If you have bad news, don’t keep it to yourself.
That was the message from a panel of turnaround experts earlier this week at the CFO Rising West conference in San Diego. While CFOs are more often than not the Cassandras of their companies, spotting crises from afar while the rest of their colleagues are in denial, their prescience won’t get them very far if they don’t communicate it properly.
“It’s incumbent on the CFO to be forceful,” said Ken Sanginario, principal with turnaround firm NorthStar Management Partners. He advocates broaching a problem early and often, “because it’s probably going to be easier to get the CEO to solve one problem with you than to face the notion that the company is in crisis.”
Harold Earley, CFO of FXI Inc. (formerly Foamex), experienced that dilemma firsthand in late 2008 when he joined the maker of foam products for the furniture and auto industries. In his first month on the job, the then-public and highly leveraged company had a precipitous drop in revenues. “Everyone thought the company would recover, that the month was a one-off,” Earley recalled. Instead, under his guidance, the company wound up filing for bankruptcy within two months.
Identifying and ultimately solving the problem isn’t likely to happen in the executive suite, however. Indeed, “what I’ve found very, very useful,” said Earley, “is that when you see things getting bad, get out to the field, to the manufacturing plants.” Back at the corporate office, “you’ll hear a million excuses” about why the company can’t raise prices or stretch out terms with suppliers, he said. “It’s when you get out to the plants where line people will tell you how far you can really push the envelope.”
A cash-flow forecast is also essential in resolving underlying problems. “You’ve got to have the best information you have flowing into a cash-flow forecast that goes out several months, so you know what kind of runway you’re looking at,” said Sanginario. Too often, management teams “think they have a plan, but run out of time” to execute it when the cash dries up sooner than expected, he added.
Plan in hand, it’s time to fess up to suppliers and customers, who are likely already worried. The worst scenario is when customers and suppliers “know what’s going on and you deny it. That’s when people panic and you start losing them,” said Sanginario. “Develop a plan and communicate it — but don’t sugarcoat it.”
Indeed, if at any point in the process a finance executive tries to back away from the direness of the situation, it is only likely to get worse, panelists said. “Where I’ve seen it go wrong is when a CFO buckles to pressure from a private-equity or other investor group to make [projections] look rosier for valuation purposes,” said Amit Patel, a managing director with Houlihan Lokey. “Then, when a customer or supplier who knows what is really happening comes in, the CFO loses credibility.”
It goes without saying that simple miscalculations and blind optimism are also credibility-killers. “As bad as it seems, the only thing that makes it worse is to have to go back [to lenders] six months later and say we need more money or need to amend covenants,” said Earley. “Going back to the well a second time is usually very, very painful.”
When all is said and done, though, CFOs who are able to nurse a sick company back to health may soon find the urge to do it again. “The thing I love the most is to go to a place that’s ‘broken,’ financially or operationally, because it allows you to bring in the biggest, most creative toolbox,” said Earley, who had worked on turnarounds prior to Foamex. “Everything is on the table.”
“It gets in your blood,” added Sanginario. “To have all those jobs saved when they might have been lost: that’s a really fulfilling result.”