New Capital __Chap018 (p.p)
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The document discusses internal and external causes for business failure, as well as signs that a company may be in trouble. It outlines factors like recession, changes in management, lack of planning, and cash flow issues. The document also provides steps for turning around a troubled company, including cash flow analysis, determining available cash, cutting costs in areas like payroll and capacity, and considering longer-term solutions.
New Capital __Chap018 (p.p)
- 1. CHAPTER 18 The Entrepreneur and the Troubled Company
- 2. External Causes for Failure Recession Interest rate changes Changes in government policy Inflation The entry of new competition Industry/product obsolescence
- 3. Internal Causes for Failure Inattention to strategic issues Misunderstood market niche Mismanaged relationships with suppliers and customers Diversification into an unrelated business area Mousetrap myopia The big project Lack of contingency planning
- 4. Internal Causes for Failure General management problems Lack of management skills, experience, and know-how Weak finance function Turnover in key management personnel Big-company influence in accounting
- 5. Internal Causes for Failure Poor planning, financial/accounting systems, practices, and controls Poor pricing, overextension of credit, and excessive leverage Lack of cash budgets/projections Poor management reporting Lack of standard costing Poorly understood cost behavior
- 6. Net-Liquid-Balance-to-Total Assets Ratio Net-Liquid-Balance-to-Total Assets Ratio = Net-Liquid-Balance/Total Assets WHERE Net-Liquid-Balance = (Cash + Marketable securities) - (Notes Payable + Contractual obligations) Source: Joel Shulman, “Primary Rule for detecting Bankruptcy: Watch the Cash,” Financial Analyst Journal , September 1988.
- 7. Nonquantitative Signals of Trouble Inability to produce financial statements on time Changes in behavior of the lead entrepreneur Change in management or advisors, such as directors, accountants, or other professional advisors Accountant’s opinion that is qualified and not certified
- 8. Nonquantitative Signals of Trouble New competition Launching of a “big project” Lower research and development expenditures Special write-offs of assets and/or addition of “new” liabilities Reduction of credit line
- 9. Telltale Trends of Organizations in Trouble Ignore outside advice People (including and usual, most especially, the entrepreneur) have stopped making decisions and also have stopped answering the phone Nobody in authority has talked to the employees Rumors are flying
- 10. Telltale Trends of Organizations in Trouble Inventory is out of balance Accounts receivable aging is increasing Customers are becoming afraid of new commitments A general malaise has settled in while a still high-stressed environment exists (an unusual combination)
- 11. Turning Around a Troubled Company Diagnosis of the problem Strategic analysis Management analysis Cash flow analysis
- 12. Cash Flow Analysis Steps in identifying and quantifying the profitable core of the business Determine available cash Determine where money is going Calculate percent-of-sales ratios for different areas of a business and then analyze trends in costs Reconstruct the business Determine differences
- 13. Potential Cuts/Improvements Most common areas for potential cuts/improvements Working capital management Payroll Overcapacity and underutilized assets
- 14. Longer-Term Remedial Actions Systems and procedures Asset plays Creative solutions