The client may still be an important source of referrals. Certain identifiable traits of financial distress are common to every troubled business, regardless of its industry or size. A thorough understanding of those traits is helpful in choosing a course of action. This article examines the anatomy of a turnaround from the perspective of practicing CPAs and explains why a privately held midsize company has the best chance of surviving when its outside CPAs actively participate in the solutions to its problems, even if the CPAs need to abandon their independence.
But when a midsize business gets into trouble and fails to take corrective action, eventually its bankers lose confidence in management and often require a turnaround specialist as a condition for credit renewal. However, whether they realize it or not, CPAs speak the language of turnarounds and are frequently more qualified to assist a midsize business in financial distress, especially if the only alternative is a bank-recommended turnaround specialist.
This article provides CPAs with the tools they need to understand and possibly assist clients with the turnaround process. The classic management consulting approach to problem-solving is a three-phase process: Analyze the problem; plan a solution; implement the plan.
Modifying this approach to a turnaround campaign includes considering the common traits of financial distress discussed above and adding two more phases to the process. The five phases of the process, presented below, each carry a suggested role for the CPA. There is overlap between them in terms of goals and timing. Therefore, the solutions, like the problems they address, must also be interrelated.
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Individual warning signs usually appear in the numbers well before conditions reach a crisis stage, and an effective leader will recognize those that threaten the business. But, by the time a trend has developed or when warning signs appear in combinations, rather than isolation, chances are that financial distress has already arrived and brought with it questions about leadership.
Early warning signs. Look beyond the numbers, whenever a warning sign appears, to properly identify the underlying cause-and-effect relationships. For example:. A revenue decline could indicate a tough new competitor has taken away market share, a major customer relationship has been damaged or the overall market has declined. Aggressive price-cutting could cause a squeeze on margins but could also be due to supplier cost increases, operating inefficiencies or a high ratio of fixed-to-variable costs.
Deterioration of receivables aging could reflect late deliveries, customer cash flow problems, or delivered quality faults. Experienced CPAs, whether performing routine audit, accounting or tax services for a midsize business, will recognize these and other indicators. Of course, each sign could be an aberration and would not be significant standing alone.
However, the longer the numbers are ignored and underlying conditions deteriorate, the worse the odds are for achieving a successful turnaround. The leadership question. A turnaround may be the most difficult transition a company goes through. It requires decisive and confident leadership and a willingness to change. These attributes are often noticeably absent under distress. Instead, the following traits are consistently found:.
Incumbent managers tend to resist change or underestimate how bad things can get. Management time is in short supply when it is most in demand, leaving important matters unattended. These two categories of common traits are interrelated and an important insight into the anatomy of a turnaround. Top management is usually part of the problem and needs outside assistance to interpret the meaning behind the numbers, regain its bearings, restore confidence, and execute a turnaround.
The primary goals of this phase are to determine whether management is able to articulate a clear, well-conceived business strategy that works for the company regularly, and to answer the threshold question: Can the company survive? This step typically takes two to four weeks. This is similar to the requirements of SAS no.
This is the most important service the CPA can first perform in assisting a troubled client. The threshold question is objective and not based on the subjective view of any single stakeholder, owner or banker. Breault, P. Baehr ed.
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The Turnaround Experience: Saving Troubled Companies - T. F. Schopflocher - Google книги
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Chicago, IL : Pluribus Press. Rosenblatt, Z. Companies fail for lots of reasons — but in only about 15 percent of all instances do they fail for reasons that could not have been addressed by management such as regulatory change, acts of God, etc. That means that most corporate distress occurs over time and while management was watching. Suppose you have a cash crisis and you know you are at risk of missing your next payroll and necessary payments unless a reduction in force is done.