The worst case scenario, honestly

Sometime, no matter how positive we try to paint the picture, the paint runs instead of drying, and the whole thing becomes a mess of conflicting and competing colours that refuse to fit into our scheme of things.

The picture simply isn’t one that we have set out to paint. That’s the point at which we want to tear the whole thing up and give it away as a bad job.

The only trouble is that when it is our business rather than a painting, walking away is not that simple. Academics call it the “exit strategy”.

Let’s face it, running a business is tricky. Business success is sometimes an elusive image of success that tempts us like a mirage in the desert. The early explorers, before they understood the physics of mirages, pursued the illusion of water until they died of thirst. 

Sometimes, people running businesses do foolish things in the hope that success lies just around the corner but, just like the early explorers, discover too late that it was all an illusion and the result turns out to be worse than it could have been.

So, let us look at what we might call the “worst case scenario”.

Sales are down, the loan facility at the bank is at its limits, and the bank is constantly chasing to get the limit down or to even call in the loan; suppliers are constantly phoning asking for their money and accounts are chasing customers to get their money in so that they can keep suppliers happening.

PAYE and GST payments are lagging and the tax department is getting serious. Some suppliers are on a “cash only” basis, which prevents the acquisition of stock in order to maintain sales. The economy has turned sour and sales have fallen off a cliff.

Unfortunately, this is not an uncommon situation. It happens in the best of times and the worst of times, although it is more likely to happen when the economy has taken a really bad turn to the south.

Many people in this situation immediately claim that their problem is a “cashflow” problem. It isn’t; the negative cashflow is only a symptom of a more serious disease which is called “flawed strategy”.

The solutions that immediately occur such as improving marketing; decreasing costs or borrowing from non-traditional sources such as family and friends are not going to work. They will result in the hole getting deeper.

It is a tricky situation in which people are caught between the law relating to trading in insolvency on the one hand and the necessity to find time to revisit the strategy that has resulted in this mess in order to determine whether to call it quits and live to fight another day.

The new strategy will involve embarking on a new direction that will necessitate the forgoing of the sins of the past and accepting the strategic disciplines that are essential for business success in good times or bad.

People who find themselves in this situation (like General Motors) can be assisted by a couple of don’ts.

The first don’t is DON’T BORROW ANY MORE MONEY unless the borrowing is accompanied with a clear and disciplined strategy that indicates that the borrowed money will help turn the business around to a cash positive situation. Even then, borrowing should be eschewed because the money borrowed will be invested in a speculative venture. There is never a guarantee that a business will survive.

The second DON’T is that it is essential not to be in denial. It is said that an alcoholic cannot benefit from help unless he or she admits their addiction to alcohol. As long as people believe that their problem is a cashflow problem and that good times are just around the corner (once again like our friends at GM), things will continue to get worse and the risk of trading in insolvency intensifies, together with the unacceptable consequences of that activity.

The third is; DON’T rob Peter to pay Paul. So often, people in serious trouble do silly things like giving preference to creditors. A particular creditor is pressing and so accounts grabs the next tranche of available cash and pays the pressing creditor, leaving other creditors having to sing for their supper. This process gives rise to another set of unpleasant legal consequences.

So, what do you do?

The first thing to do is to be ruthlessly honest with yourself and all of the stake holders. Many simply do not understand the power of honesty.

I remember being called into a company once that was legally bankrupt and had one pressing creditor which was owed millions. It was obvious that the company was unable to pay, but despite that it had made ridiculous offers to this major creditor in an attempt to achieve a bit of time in the hopes that something would turn up, like water instead of a mirage.

When I was called in, the time was up and the creditor was going to place the company in liquidation. I very quickly did some calculations that indicated that if this debt could be paid, the underlying company could survive.

I met with the creditors in a board room (it was the local branch of a major American company) and was met with an array of pin striped suited executives and lawyers. Metaphorically, they had their double barrelled shot guns primed, pointed at me with their finger on the trigger. They were mad. They had been given so much nonsense from the management of the company that I was representing that emotions had taken over. They no longer cared about the money; they just wanted to shoot someone.

I remember telling them how I had reviewed the issues and that the representations that had been made to them by management were false and could never have been achieved. I told them that there was no way they were ever going to get their money. However, I said that if they gave me a fortnight I would make them an offer, but that offer would be a lot less than they were owed but that I would not make an offer unless I had the money in the bank and was certain it could be paid.

The actual conversation took a lot longer than this. In the end, the guys put down their guns, asked me to wait and finally came back and told me that they would give me two weeks.

I did a quick cap in the hand capital raising, which got me hundreds of thousands rather than millions, and put the offer to the CEO, who was a bit stunned at the “low number” but came back in a couple of days and accepted the offer. The company is alive and well today.

Sometime later I was talking to the CEO with whom I did the deal, and asked him why he gave me time. His reply was short, and a great lesson. “It was your candour. You were honest with us, and we believed you. In the end, you delivered on your promise.” Honesty saved that company.

However, it was not only with suppliers but with shareholders and staff that I had to be honest. By painting the true picture without hiding any stuff, everyone knew the true situation. Some weren’t particularly happy in the presentations I made to them, but with only one exception, shareholders put their hands in their pockets (which weren’t very deep as it was a co-operative) and handed over the money they promised.

Each person, when handing over their money, told me that it was the ruthless honesty with which I explained the situation that persuaded them to take the risk.

On occasions, even the tax department have given me a break when I have honestly explained the problems of the client to them.

However, there is quite a difference between honesty and stupidity.

This brings us to the next thing that one has to do in a tight situation. Never make a promise you can’t keep. If you can’t be sure about your ability to keep a promise, you have to be quite open and honest about this, and it is better to face the crisis with honesty than to continue with the illusion of a mirage.

South West Airlines, which is said to be the most successful airline in the world (this is said mainly by American Business Schools) had a real problem during the second oil shock when the price of oil jumped dramatically. Herb Kelleher, CEO of the company, levelled with his people and told them of the company’s predicament. He did it in the staff kitchen where he customarily had his meals. The staff kicked in some of their salary to compensate for the increase in fuel prices making it possible for the company to retain its competitive pricing and get through without “downsizing”.

I have gone to landlords who have been owed thousands in unpaid rent (the rentals having been negotiated in better times for space that was ridiculous and at prices which reflected a belief that the world would not come to an end). Serious landlords see the benefit of long term customers and they have listened to my story, reduced the area and the rent with a revisit clause when times are good again.

I know one very successful company today that back in the early 1990s simply couldn’t pay their rent. By honestly going to the landlord, we were able to renegotiate the lease, wipe off arrears and go ahead on the basis of the restructured strategy. That company is a leading entity in its industry today.

However, in all of these cases, what has been a fundamental of success, apart from honesty, has been the restructuring of the business according to strategic disciplines that guarantee success not only in the short term but in the long term. An essential element of this strategy is the necessity to be able to deliver benefits to customers at a price which represents value for money. Without that, all the honesty in the world is not going to work.

One final thing!

Honesty has to be accompanied by a demonstration that convinces people you are serious. If you have flash cars leased through the company or houses being paid for by the company or other perks; surrender them. Take the hit on the lease or any of the other private perks to which you have been used. If your strategy is right, your honesty with people will convince them you are serious and you are taking your medicine in the same way that you are asking others to give you a hand.