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I totally agree with the strategies listed in “Looking for the Light” (January/February): if you really get a good handle on cash, manage to cut costs (wisely!), and establish honest communication with all stakeholders, chances are you will soon be on the right track for a turnaround.
However, I would add another strategy, which I believe goes hand in hand with all of the above and is often neglected, and that is to have a very close look at all corporate processes and their deep influence on cash flow, costs, and communications. For example, a purchasing process that does not come with an accurate forecast of all short- and long-term needs of operations will most likely drive costs higher than it should, including counterseasonal overages and disruptive shortages. A delivery process that does not support the sales promises or the marketing strategy will not make customers very happy, no matter how nicely you talk to them. A strategic-planning process that fails to recognize the true market opportunities and threats will most likely send the company and its products into a downward spiral sooner or later.
To summarize, I believe the turnaround expert should not only be an exceptional analyst and honest communicator, but also possess an in-depth understanding of how all the different functions of the company interact with one another and how cross-functional processes should be (re)structured to minimize costs and maximize the ultimate value of the final product or service delivered by the company.
Chief Financial Officer
Intelity Solutions LLC
Every company needs timely, solid cash-flow forecasts, both short-term and long-term, to provide early-warning signals. Every troubled company I’ve worked with has lacked this fundamental information.
The North Highland Co.
The article “Taking the ‘Ease’ Out of ‘Lease’?” (December 2010) suggests that the impact of the lease-accounting proposal on lessees’ balance-sheet ratios is a flaw in the standard. Actually, this is a key point of the standard. It is interesting that the effect on the ratios could affect compliance with debt covenants for so many lessees. That suggests that lenders were not using information in the footnotes to lessee-borrowers’ financial statements to properly model the borrowers’ long-term cash-outflow obligations.
At the end of the article, leasing experts say that off-balance-sheet financing is not the critical lease-versus-buy criterion for most lessees anyway. Does that mean the proposed standard would not have such a big impact on companies’ leasing decisions after all?
I do agree that the standard, as proposed, would be difficult to implement, including parts of the proposal that are beyond the scope of the article. For matters like accounting for the effect of contingent rentals, we can hope that auditors and regulators will accept reasonable, practical accommodations in making related estimates. However, experience might suggest that such hopes are misplaced.
The Kids Are All Right
While your article on spreadsheet problems (“Total Trouble,” Topline, December 2010) addresses a valid issue that could potentially cause errors and compliance risk, the full extent of such problems may not have been addressed. Oftentimes, Manual Calc is turned on when Visual Basic or functionality macros are being utilized. This can create confusion, particularly if spreadsheets are in draft form and passed between users, or are locked, or the VBA coding is done incorrectly (that is, Manual Calc is not coded to on/off for user friendliness).
In most cases, the users developing this sort of advanced functionality are, as you note, younger analysts or IT whizzes. But to specifically pinpoint the younger generation as being susceptible to this trap is to grossly misrepresent the issue. Those who are unaware of this functionality likely need to take a basic Excel course. And, based on my experience as a young financial consulting analyst, older generations are more likely to be unaware of the issue than younger workers.
More Perspective on Dodd-Frank
I appreciate Vincent Ryan’s article “Making Sense of Bank Reform” (November 2010), and agree that the Dodd-Frank Wall Street Reform and Consumer Protection Act is large in scope and extremely complex. However, I thought it might help to give this legislation some additional perspective.
Dodd-Frank incorporates more than 530 regulations and, as Mr. Ryan points out, more than 60 studies and over 90 reports (while the Sarbanes-Oxley Act required what now appears to be a meager 16 new regulations and 6 studies). Compound the impact of Dodd-Frank with the likelihood that international financial reporting standards will be implemented in the United States in the near future, and we face two incredibly large regulatory initiatives that will impact banks’ balance sheets and disrupt business models for years to come.
While a tremendous number of resources will need to be committed to adapt to these changes, I believe there could be a silver lining for those institutions (and their customers) that go above and beyond the requirements of Dodd-Frank and future regulatory requirements sooner rather than later.
While significant capital and resources will be needed, I believe this is an area where there is an opportunity to go beyond the requirement, by not only improving risk management and reporting, but also the overall visibility and functionality of enterprisewide operations. For instance, stress tests will become standard and more frequent in the new regulatory regime. Banks that make the commitment to building robust systems and structures to accurately measure the health of their organization will best serve their regulators and customers, while containing costs of an otherwise expensive process.
Ultimately, these regulatory requirements should be viewed as an additional benefit of having better management information to drive higher returns on risk-adjusted capital.
Dodd-Frank is far from decided, and will take years to implement. But the institutions that get ahead of new regulations will be better served in the long term. Finance executives should take note of those banks that demonstrate this foresight when deciding which ones to partner with, because ultimately these will be the most financially sound institutions left when the dust settles.