The Entrepreneur & the Troubled Company Venture Planning Chapter 18 Dowling Fall 2005

Internal Causes for Failure Inattention to strategic issues Inattention to strategic issues Misunderstood market niche Misunderstood market niche Mismanaged relationships with suppliers and customers Mismanaged relationships with suppliers and customers Diversification into an unrelated business area Diversification into an unrelated business area Mousetrap myopia Mousetrap myopia The big project The big project Lack of contingency planning Lack of contingency planning

Internal Causes for Failure General management problems General management problems Lack of management skills, experience, and know- how Lack of management skills, experience, and know- how Weak finance function Weak finance function Turnover in key management personnel Turnover in key management personnel Big-company influence in accounting Big-company influence in accounting

Internal Causes for Failure Poor planning, financial/accounting systems, practices, and controls Poor planning, financial/accounting systems, practices, and controls Poor pricing, over-extension of credit, and excessive leverage Poor pricing, over-extension of credit, and excessive leverage Lack of cash budgets/projections Lack of cash budgets/projections Poor management reporting Poor management reporting Lack of standard costing Lack of standard costing Poorly understood cost behavior Poorly understood cost behavior

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)

Non-quantitative Signals of Trouble Inability to produce financial statements on time Inability to produce financial statements on time Changes in behavior of the lead entrepreneur Changes in behavior of the lead entrepreneur Change in management or advisors, such as directors, accountants, or other professional advisors Change in management or advisors, such as directors, accountants, or other professional advisors Accountant’s opinion that is qualified and not certified Accountant’s opinion that is qualified and not certified

Non-quantitative Signals of Trouble New competition New competition Launching of a “big project” Launching of a “big project” Lower research and development expenditures Lower research and development expenditures Special write-offs of assets and/or addition of “new” liabilities Special write-offs of assets and/or addition of “new” liabilities Reduction of credit line Reduction of credit line

Telltale Trends of Organizations in Trouble Ignore outside advice Ignore outside advice People (including and usual, most especially, the entrepreneur) have stopped making decisions and also have stopped answering the phone 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 Nobody in authority has talked to the employees Rumors are flying Rumors are flying

Telltale Trends of Organizations in Trouble Inventory is out of balance Inventory is out of balance Accounts receivable aging is increasing Accounts receivable aging is increasing Customers are becoming afraid of new commitments Customers are becoming afraid of new commitments A general malaise has settled in while a still high-stressed environment exists (an unusual combination) A general malaise has settled in while a still high-stressed environment exists (an unusual combination)

Turning Around a Troubled Company Diagnosis of the problem Diagnosis of the problem Strategic analysis Strategic analysis Management analysis Management analysis Cash flow analysis Cash flow analysis

Potential Cuts/Improvements Most common areas for potential cuts/improvements Most common areas for potential cuts/improvements Working capital management Working capital management Payroll Payroll Over-capacity and underutilized assets Over-capacity and underutilized assets

Longer-Term Remedial Actions Systems and procedures Systems and procedures Asset plays Asset plays Creative solutions Creative solutions

Cash Flow Analysis Steps in identifying and quantifying the profitable core of the business Steps in identifying and quantifying the profitable core of the business Determine available cash Determine available cash Determine where money is going Determine where money is going Calculate percent-of-sales ratios for different areas of a business and then analyze trends in costs Calculate percent-of-sales ratios for different areas of a business and then analyze trends in costs Reconstruct the business Reconstruct the business Determine differences Determine differences