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Some Fundamental Antidotes to Failure

By Robert Wexler By the time I get involved, the banks want their money because they're worried. Vendors want their money because they haven't been paid in two, four, six months. You have employees looking for accrued vacation pay and the bonus they thought they were getting -- again, the money. And then there's me: I want my fee.

All of those people are trying to chase you for the money.

It's the uphill battle for a company growing so rapidly that it doesn't have enough cash to fund expansion. Or -- and far more typically -- it's the downhill slide for an enterprise whose fortunes are fading fast, whose sales have slowed, and whose accounts receivables and payables are mounting.

Either way, that's where I come in. I'm an entrepreneur who is now working as a turnaround specialist, consultant -- some prefer "artist." For the past decade, as co-founder and founder, respectively, of two Boston-based "workout" firms, I've helped companies as diverse as a go-go technology company that ran out of too much venture funding and an old-line New Hampshire metals manufacturer. (The technology company was gracefully liquidated, while the metals manufacturer was successfully turned around.)

CASH IS KING. So I am writing this article for you, the entrepreneur, because I don't ever want you to have to call on me. Keep in mind that I've also been in your shoes. After graduating from college in 1969, I joined my brother in running my family's construction company. We increased revenue 25 times, to $50 million, over 15 years and added three new divisions.

After a brief corporate interlude (as a vice-president for Rockport Shoe, which was eventually sold to Reebok), I again turned to a venture of my own. With the people who founded Rockport, I set up a private equity company, investing in businesses as diverse as a hotel and a fledgling salmon farm.

Throughout my career -- from the enterprises I operated or in which I invested to the picking up of the pieces that I do today for others -- it has become clear to me that the single most important tool for building new companies or saving dying ones is the deft management of cash flow, that stream of money pouring continually in and out of your company.

In other words, your accountant may say your business is profitable. But he or she could be assessing only the profit-and-loss statement (which tracks noncash items as well as dollars) or the balance sheet (a snapshot of assets and liabilities at one particular point in time). Just because you are making a profit does not mean you will be successful unless you are generating cash or have access to cash. It's as fundamental as that.

ENTREPRENEURIAL DELUSION.All of which raises another fundamental: that entrepreneurs -- at least the ones I tend to work with -- are unlikely to accept the fact that cash is, in fact, king. As people who are good at building companies, entrepreneurs are impatient with the methodical task of tracking the dollars that come in and go out. In small companies, moreover, owners are unlikely to employ a controller or financial officer whose job it is to do that.

It's an ego thing, too. When cash is short (either because of fast growth or slowing sales), an entrepreneur takes the problem personally. The company, after all, is his or her baby. As optimists, they are also likely to think, 'Just wait until next month or next quarter when things will surely improve.' Right? Taking action to confront and correct a cash-flow imbalance isn't something that comes naturally.

Add to this the tight web of relationships upon which entrepreneurs build companies -- the people who helped them get started, their employees, and vendors. You've played golf with your biggest vendor for years, had him to your house, and to your family functions. How do you look him in the eye and say he won't be getting paid? You don't.

If entrepreneurs don't take this reality to heart and get past the delusions that "things will just work out," they might find themselves in big trouble. Someone like me will deliver the hard dose of reality, getting a handle on which of the people clamoring to be paid will get paid when there isn't enough money to go around. Often, it's late. The banks are threatening to call the loans and vowing never to lend again. Sometimes, the board recognizes that there are problems. On rare occasions -- I've seen two or three in the past decade -- it's the entrepreneur who makes the call for help.

PUTTING OUT FIRES. In the recent past, cash-flow issues have been exacerbated by a shift in business thinking toward spending to build market share at the expense of profit. In the case of the go-go technology company that I was called in to help, the entrepreneur actually had a brilliant idea that could have been the foundation for a new business model in the insurance industry. He had technology designed that seamlessly linked customers and insurers, enabling policies to be sold in one step. Sales were made in discount retailers.

Predictably, the idea caught fire among venture capitalists. The VCs poured $100 million into the company, which I would argue was entirely too much money. The entrepreneur used the money to build his work force to 500. Then he began running out of cash before selling enough policies to turn a profit and cover those costs. By the time I came in, it was too late to attract other investors, and the company was ultimately liquidated.

It isn't only those companies with the trendy spend-at-all-costs mentality that suffer from inept cash-flow management. Take the old-line New Hampshire manufacturer, in which I took an equity stake. When I stepped in, it was bleeding cash. I had to restructure $8 million in debt, settle a Department of Labor lawsuit, and motivate a demoralized work force before I was able to turn the company around. I was able to sell my interest within nine months for a 22% return on equity.

A potentially lethal combination for a company is at work. Cash is king. But many entrepreneurs do not accept or act on that principal. So avoid having to turn to me by taking stock of a few good fundamentals. Here are the key points:

Spend less. Be conscious of where every dollar goes.

Refuse to spend until you make the money from your business that you will use for your purchases.

Formulate a business plan that projects when your company will break even -- that is, when it will be taking in as much cash as you are paying out.

Manage according to that plan and do so every month, tracking the reality of your sales to the expectations of your projections. If there is a negative gap, cut back -- and quickly. If the gap persists, look more closely at your business plan and consider whether or not you really have a business.

Don't delay seeking help. If you don't have a financial professional on staff, go to your board of advisors. Or call a turnaround specialist to take a quick pulse of your business.

In short, what you need to do is avoid what I call the "spiral": the thinking that next month or next quarter the business will get better, and so you can spend now and hold off paying vendors. Whether yours is a growing company or one that is troubled, you might think that you can't run it by the numbers. But be assured: you need the numbers to keep it running. As I've said, just a few good fundamentals.

Robert Wexler, 54, is the president of Tron Group, a Boston-based private equity firm, providing management and capital to private companies. Previously, he was a partner in an international turnaround firm. He has also owned and operated a $50 million construction company, a manufacturing company and a real-estate firm. He is a 1969 graduate of the University of Vermont and holds an engineering degree from Northeastern University. Entrepreneur's Byline comes to BusinessWeek Online readers courtesy of, which is sponsored by the nonprofit Ewing Marion Kauffman Foundation.

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