Ready for the Worst

If your company hits a wall, do you have what it takes to make the best of a bad situation?

When Robert McDonald was named CFO of Woolworths last October, he sounded like a man on a mission — and with good reason. The troubled UK retailer lost nearly £100m (€111m) in the six months to August 2008, and McDonald joined an army of new executives — including a new CEO — to turn it around. “There is space on the High Street for a successful home-based variety store,” he told investors reassuringly.

But he was wrong. As its cash crisis worsened, Woolworths entered administration in late November, hoping to find a buyer. In early January, with none in sight, its last shops were shut down.

More CFOs will find themselves running the finance function of an insolvent business as the downturn continues to take its toll. Euler Hermes, a credit insurance company, predicts the number of insolvencies worldwide will rise by 25% this year following a similar increase in 2008. In western Europe, the UK could be particularly hard hit — the firm predicts a 34% rise this year following a 25% increase in 2008. In France and Germany, it forecasts a rise in insolvencies of around 12%. The Netherlands could see a surge of 38%. In eastern Europe the firm predicts rises of 20% in Hungary and 15% in the Czech Republic. (See “More to Come” at the end of this article.)

Though a daunting prospect for most CFOs, a burgeoning corporate rescue culture means that there is greater scope for effecting a turnaround than in the past. Countries across Europe have introduced schemes similar to Chapter 11 bankruptcy protection in the US, aiming to give a company breathing space from creditors and a chance to recover, rather than just being wound up. Incumbent management teams can prove a pivotal part of the process.

The UK’s administration process — overhauled in 2002 — is a case in point. Initiated by either a company or its bank, a professional takes control of an insolvent company, aiming to rescue it or at least squeeze out more value for creditors than liquidation could achieve. A string of distressed retailers in the UK used the process in the aftermath of Woolworths’ collapse. But regardless of where a company is based, the basic skills needed from CFOs during administration are the same everywhere.

So what does it take for finance chiefs to hold it together even as their companies are falling apart? Insolvency practitioners and restructuring experts cite three skills when describing their ideal CFO — a perfect grasp of up-to-date figures, the ability to plan for every eventuality and a strong enough voice to ensure that when you speak, your board listens. These skills shouldn’t be alien to an experienced finance chief, and yet insolvency experts bemoan a lack of them in the cases they’re seeing today. If a CFO can manage to demonstrate these key skills during troubled times, there may still be a job awaiting them at companies that survive.

Tick These Boxes

It would seem to be a given that a CFO in any situation should have a thorough grasp of the company’s finances. But insolvency experts certainly don’t take this for granted, particularly if there’s been a high turnover in the executive team. And as a company’s performance deteriorates, the challenge for new CFOs and FDs to stay on top of the numbers is all the harder. Chris Laverty, a partner in the corporate recovery team at KPMG, says, “In an administration, my first thought is, ‘Oh no, the FD has only been here two months.’”

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