When a chief restructuring officer (CRO) begins to analyze what’s ailing a small or medium-sized company, a thorough assessment of the situation must be job #1. Has a key employee or owner retired or passed away? Have sales fallen? Expenses increased? Is there a shortage of supplies, or just cash?

Most of the calls to the restructuring unit at TAP Financial Partners are prompted by ownership experiencing a shortfall in cash to meet payroll or pay expenses. Often, however, cash flow is just a symptom of other underlying problems that must be addressed quickly to keep the business from failing.

Scenario 1: A business can be making a profit but still not have cash on hand if accounts payable is making payments to suppliers on the usual schedule while a key customer was falling behind on paying receivables, resulting in a shortage of available cash.

Scenario 2: The company’s regular estimator goes on vacation and another employee steps in to quote on a large order. Being unfamiliar with the role, it’s easy to forget to include raw material cost increases, which can cause a business to lose money on the order and face a subsequent cash crunch.

Situations like these lead CRO’s to ask several assessment questions simultaneously. What is going wrong? Who can change it? How long do we have to fix it? To determine the answer to that last question, it’s necessary to quickly prepare a cash flow forecast for the next 13 weeks (approximately one quarter of the year). It’s critical to know how much “runway” the business has so that we know how urgently actions need to be taken, and what the likely answers are. The process of preparing this forecast often highlights the most likely problems, and also some of the likely solutions.

Once we know how long we have to fix the problem(s), then the search is on for the cause of the situation. Usually, something changed, and either wasn’t noticed, or was noticed but required a difficult decision that didn’t get made. It’s easy to suffer from the “sunk-cost fallacy,” but a CRO objectively looking into the situation has an easier time looking past  sunk costs and implementing a change of strategy. This can mean abandoning things that were formerly cherished, and coming to grips with why they no longer make sense.

The most difficult issues to confront are those that deal with personnel. We become friends with colleagues and value those relationships, so it’s just human nature to want to overlook issues with those we are close with. The reality, however, is that whatever the reason for the drop in performance, it’s likely to continue, because employees tend to repeat the same tasks or behaviors, even if they aren’t working, since that’s the way they’ve always done them (and there was a time when the approach worked). A CRO coming in new to the situation has an easier time assessing the performance the business requires without the emotional attachments that can interfere with objective judgements.

Once the situational analysis is complete, decisive actions need to be taken to quickly restore the company to at least the break-even level where cash can be conserved and the  business can continue to operate.

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