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Putting eggs in the right basket(s)…

egg-basket.jpgWhen we talk of corporate collapses or failures, the common myth is to attribute it to the chronic illness of the industry sector itself or to the hasty and over-confident decision making of the managers or still to financial dealings not going well on reasonable terms. But, if you look at these companies closely, one realises that most of these failures are in companies with a successful track record and where the management was absolutely methodical with complete business plans in place and the capital availability being an absolutely non-issue.

So, where lies the problem then? When the panic button is pressed, the biggest mistake managers do is to misdirect their efforts… rather than focus on the corporate strategies and get back to the drawing board, every executive takes this failure to be a financial one… and goes about setting the cash flow problem right. This is partly on account of the confidence the executives have in their strategies and an ego battle of revisiting the strategies which they themselves have come up with in the first place. Eventually, the course becomes the same… their intermediate damage control exercise leads to more manifestation of the problem and lo’ the company sees a RED.

Now, it is not that careful cash flow management is not a part of the best damage control exercise… but then the priority has to be on the corporate strategies and business plans. The root cause of such failures is pretty simple… a company does very successfully… turns in huge profits and dividends for the shareholders. Banking on this success wave, the shareholders push management to move ahead even by offering funding… add capacity, enter new markets or acquire competitors. And then, the company goes on without realising that the increased supply is still gonna vouch for the same demand in the market. Incumbency sets in… and the whole extra output doesn’t find a market… and lo’ the slump begins.

Typically, in times of company failures, the most common action is to hire crisis managers for company doctoring. David James, a professional crisis manager for 30years has developed 7 rules for crisis management as a consistent routine:
1. Commission a solvency report
The Board to commission an investigative report by a major accounting firm (not the company’s auditors). One outcome is the information on the extra funds required to keep the company solvent and secondly, the report also provides a comprehensive analysis of the company’s balance sheet, its assets and long-term liabilities.

2. Hide the checkbooks
Make sure that no money goes out the door without the knowledge of the crisis manager and especially the panic spending needs to be checked.

3. Identify the hidden heroes in the organization
These people are rarely from the existing top management and can be identified through continuous interaction (meetings and general visits around the facilities) and through specific tasks like asking the Unit Heads to prepare a business plan on how they can make their units saleable.

4. Sweep out the old leaders, if necessary
Typically, it is good to have the existing managers involve in the rescue process but then unfortunately, it doesn’t work well in a number of cases… since these very people maintain their hope for some miracle solution and resist the crisis managers in an effort to conceal their failures.

5. Make decisions including wrong ones
The penalty on late decisions is more than that on wrong decisions…. so time is of essence. Crisis managers ought to take decisions @ the right time… and then continuously assess the impact and be ready to do mid-term corrections.

6. Always have a Plan B
Although everyone would have the confidence that the rescue will work out just fine and get the company out of bankruptcy, it is always a good practice to have a contingency plan. Again, the logic here is that if plan A fails and there is no alternate plan, the loss is absolutely imminent and quick while a plan B will still offer chances of maintaining solvency although at a lower yield rate.

7. Get more money than you think you need
There is no harm in having more money than is required… since rescue efforts can go either ways on the funding scale. Company rescue efforts have often failed for want of that incremental funds which was not provisioned for earlier.

In all this… the lesson for all business executives is to keep a watch on the company performance and be prepared to handle any eventualities arising out of changes in the internal / external operating environment. That is the only way to keep it in the GREEN.

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