Science has proven that the more stressful the situation, the less rational the decision-making. Our ability to process complex information diminishes, perceptions distort, and focus narrows. When that happens, people and companies rarely survive.
Consider this example: ABC company generated annual net income of $3 million on $65 million in revenue. The family owners departed. Five years of deepening distress followed. Fourteen months later, annual revenue was at 50% of plan, monthly EBITDA was averaging negative $400,000, and weekly cash burn approached $100,000. Frustrated, fatigued and burning cash faster with each attempt to improve, the shareholders gave up and made plans to exit.
But something unexpected happened. The chief restructuring officer appointed to wind down ABC stabilized the business, generated cash to support operations, and posted a profit for the first time in 18 months. ABC was no longer at death’s door. What made the difference? An unrelenting focus on this survival mantra: “Cash, communication, control.”
First, stop the bleeding, then find and fix the source. Clearly, more cash can’t go out than comes in. Yet smart, experienced people who owned and managed ABC allowed that to happen. Blinded by “good news,” they focused on doing more of the wrong thing with more money. Therefore, step one is to do the known, right thing and stop the cash bleed. Initially, it doesn’t matter why cash is bleeding; it simply matters that the bleeding is stopped while not further crippling the business or exposing fiduciaries to additional liability.
Reach out early and often—even when there’s nothing to say. Amid fear, shame, anger and other crisis-induced emotions, communication fails. Information is held “close to the vest.” Executives hide in their offices. Productivity declines. Good people leave, and fear grips those who remain. Instead, leadership can effectively communicate with honesty, transparency and frequency.
Know where you are, where you are going, and course-correct as necessary. Evolving a new way of seeing begins Day One through whatever mechanisms, policies and actions make clear this is about survival, not business as usual. By the end of the second week, a plan should be complete and vetted with allies whose support is critical. The plan begins with a cash model but, inevitably, includes a map for operational restructuring. Control is the implementation of the turnaround plan with practice, monitoring, assessment and adjustment.
The 3C’s Coordinated: Surviving
ABC’s team refused to quit, despite prior failures and terrible odds. They were unrelenting in repeating and enacting the mantra “cash, communication, control,” and the results were striking. Cash breakeven was achieved within six weeks. Margins improved monthly. Operating income hit breakeven. Profitability was achieved within four months after years of losses. And, a buyer expressed interest as an alternative to a shutdown. With the newly found cash runway, diligence commenced on the day the lights were previously scheduled to be shut off.
Cynthia Romano is a global director of CohnReznick’s Restructuring and Dispute Resolution practice. She has more than 25 years of experience in performance improvement, turnaround management, transaction support and investment analysis, and has used the “three C’s” to drive change in troubled situations.