business

Solve Your Cash-Flow Problem to Stay in Business

Editor's note: This is the first in a new series of case studies about business turnarounds. Names and identifying details of the company used as the example have been changed.

Problem: The Cash Cow Is Dead

Hot & Cold Inc., a plumbing and heating supply company in the heart of Virginia's Shenandoah Valley, is headed for the slaughterhouse. As the housing boom grew, so did sales, from $7 million a year to $14 million over four years. But as the company expanded, its problems multiplied, and no amount of sales could cover the warts. As the economy faltered and poor management continued, revenue started dropping by more than $2 million a year. There were no easy sales to be milked that would carry the company through to the next quarter. Instead, it has been leaking hundreds of thousands in profits and cash.

Crunching the numbers over the past five years shows lost opportunity and bad financial management have cost the company about $5 million in profits. Overtime alone is about $250,000 a year. Today Hot & Cold is at $6 million in sales and is running at a loss in excess of $1 million. The bank is nervous, and ready to pull the plug on its line of credit. The steady supply of new business has dried up, and the three owners' lives are on the line. The old cash cow is chopped meat.

To keep the company alive, they've mortgaged their homes, maxed out their credit cards at usurious interest rates, and cashed in their 401(k)s. With college-age kids and wives with expensive taste, money issues are creating serious tension on the home front, and the desperation and panic that the owners are feeling is transferring to their employees. Worker morale is low, and employees are phoning it in because they are convinced they'll be out of a job tomorrow. As a result, the few remaining clients are unhappy, and threatening to take their business elsewhere.

Solution: Control, Control, Control

The owners of Hot & Cold have three choices: Walk away at great personal financial ruin; hope for a big client to fly to their rescue and help them pay off their huge debt; or take control of their own business. They're teetering on the verge of bankruptcy, but it's not too late.

The three guys who took over from the family who founded Hot & Cold have no training as managers. These are hard-working, talented contractors and engineers with great knowledge of how to carry plumbing and installation projects to completion. But, for most of their careers, they worked for somebody else. When they got the chance to run their own business, it never even occurred to them that ownership requires a whole other skill set. They assumed they'd ride out the production boom, and sales would just keep growing. But all they were doing was allowing the company to grow out of control.

They need to adopt some humility and recognize exactly where they failed before they will ever get their cash management under control. Unfortunately, it's taken this life-or-death crisis to bring them to this point. But they just might get through this if they comb through their books and get control over their costs by streamlining their sales, bidding, and estimation processes.

First they need to sit down with each department head and develop an adopting plan for cash management. They need to be clear in their instructions, and forceful in their insistence that there will be dire consequences for failure to comply. Hold department meetings at 8 a.m. on Monday, issue marching orders, then meet again on Friday at 6 p.m. to see what did and did not get done. Every job needs to be monitored by microscope from start to finish. These owners are not dopes, but there's been a failure of leadership and they've been naive. They need to be leaders, not grunts. Until now, they've identified too much with the people who work under them.

It'll hurt. Hot & Cold requires drastic internal overhaul, including deep cuts in operating costs. They can't be "tepid" about this. At least 20% of their workforce of 50 will have to be fired. The owners need to operate as if they have filed a formal Chapter 11 and proceed as if they are under strict orders from bankruptcy court to renegotiate with vendors and come up with a realistic payment plan. It's not just about micromanaging costs. This business needs to get serious about collecting the cash that clients owe them, even if they have to take a hit by offering cash discounts or accepting partial payment just to bring the money in.

I also recommend that they meet face to face with their banker. If they've followed my advice so far, they will be able to point to the cost measures already in place and forestall foreclosure on their loan. The bank wants its money back, but if Hot & Cold can present them with a detailed blueprint for strict fiscal and operational discipline, they will win the extra cash flow their business desperately needs to live another day.

—With Samantha Marshall

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE