Restructuring a Problem Company

12 ways to get your troubled business back on track

Your company is in trouble. Your orders are down, your customers don't pay, your employees are scared, and the ATM consistently spits back your card at you with disdain. Certainly you'll have to make some changes if you intend to survive. But what can you do?

Plenty, believe it or not. It may not seem like it now, but it's possible to dig yourself out of that hole and even come back stronger--provided you're willing to commit yourself to making some adjustments in the way you do business. We must warn you, this process is probably not going to be terribly pleasant. But walk yourself through the following 12 steps, in no particular order, and it'll all be worth it.

1. Find out how long you have to live.
You know it's all about the green. It doesn't matter a lick that you are close to profitability or have thousands of satisfied customers if you run out of cash. So if you're not obsessed with your OOC ("out of cash") date, you should be. Write it backward on your bathroom mirror in red lipstick.

Improving your cash-flow position starts with awareness. George Mueller, 31, CEO of digital lighting company Color Kinetics Inc. , is all too familiar with this concept: "At Color Kinetics," says Mueller, who has grown his Boston-based company from two to 80 employees in just about four years, "the CFO e-mails our exact OOC date to all senior management on a weekly basis, so that everyone is aware."

2. Get paid.
Go to work on your working capital. Howard Anderson, senior managing director of venture capital firm YankeeTek Ventures , says you should work on your accounts receivable every day. That's right, every day. It sucks, yes, but if you don't, two things may happen: 1) Some other guy gets paid first, or 2) Your customer goes out of business before paying you.

Mueller expands on the concept: "Bring the small-company aspect into it. Get your relationships to drive the payment process. You need to be able to say, 'Look, we are just a small company, and we need to be paid on time to work with you.' " In other words, work your contact, and stop dealing with that accounts payable department in Ireland.

In addition, don't be afraid to ask for upfront payments, offer special discounts for a limited time on accelerated payment and tighten up your credit policy. "Be careful about who you extend credit to," advises Anderson. At this point in the economy, you should have no reason to assume that the other guy isn't having the same financial problems you are.

3. Negotiate everything.
You have to balance your moral obligation to your suppliers with your goal of staying alive. Your major vendors constitute important relationships, particularly those that aren't easily replaced, and you also have a reputation to uphold. (Remember, for most entrepreneurs, you are your business.) However, your vendors would rather be paid later than never at all, and they would rather be paid 50 cents on the dollar now than 10 cents two years from now in bankruptcy court. You can negotiate with your vendors, as long as you're forthright. Say, "Look, I can pay you X percent now, and if we make it, I can pay you the rest later and we'll all win. Otherwise, you'll wind up getting a lot less."

4. Diet and exercise.
The key to survival, says Anderson, is to cut your burn rate. He recommends that you frame the following motto and hang it on your wall: "Use it up, wear it out, make it do, or do without."

Mueller agrees that even if you are a relatively new company, you can do better on cost control. "Frequently most people don't manage the expense line well enough," he says, "and that is the one line you have complete control over."

Variable marketing costs and travel and expenses are the first line items to look at. Mueller recommends asking your salespeople, "Do you really need to fly there this week? Can we send fewer people to the trade show?"

If you have experienced staff on hand, they should know the benchmarks for appropriate costs in your industry. "Once at Color Kinetics," explains Mueller, "our VP of manufacturing put out a notice that all overnight shipments had to be signed off by senior management. I thought this was a far too bureaucratic process at first, until I learned that our shipping costs where about three to four times that of our competitors. The result was significant cost savings."

If you don't have these benchmarks available in-house, go out and get them. For instance, six years ago, at age 31, Robert Kelly purchased Chicago-based skin care cosmetics wholesaler Phyto Cosmetics. Because Kelly was new to the field, he approached industry experts to find out where to get the most bang for his buck. "They told me which trade shows to go to and what returns to expect from various marketing techniques."

5. Beat the streets.
You need to get as much revenue in the door as fast as you possibly can. Change your pricing structure, increase shipping and handling charges, add an "administrative fee," look for new markets, seek out extensions to existing markets--or all of the above.

Meet with your sales team 10 times a day. Mueller says you better make sure your sales team knows what's important--the key accounts that will generate immediate cash and so forth--and get them focused on collections as well. In fact, why not get the whole company involved? Says Mueller: "Tell everybody to call five accounts. Everybody in the whole firm, start smilin' and dialin'. Give them the quick and dirty sales process, and for the next two weeks you've quadrupled your sales force."

6. Get the whole company involved.
You'll be surprised at the ideas that come up if you take the time to discuss your current situation with your employees. After all, they have a vested interest in your company's future as an ongoing concern, and they can really highlight the inefficiencies in your organization. Plus, if they come up with the idea, they'll be more willing to deal with the painful consequences. If it's your employees who together decide they can do without unlimited KitKats, then instead of an ogre, you're a hero. And instead of productivity suffering, it may actually increase.

  A Case Study in Survival: Audium
Mike Bergelson, the 28-year-old co-founder of voice application technology company Audium Corp. , had a problem. About a year after its founding, the company found itself just two months from its OOC date. Audium had 15 employees and some interest from outside investors, but Bergelson knew they couldn't close an equity round in time. Worse yet, the five co-founders had already incurred significant personal debt and had yet to draw a salary. "We had two options," recalls Bergelson. "Shut it down, or go for it. We decided on the latter and shook hands on it. For six weeks, I never slept a single night."

The first thing Audium did was cut everything noncritical to moving forward. They got rid of their PR and accounting firms and terminated an administrative employee. They moved themselves to cheaper offices and asked a few of the more highly paid employees if they would go without pay for two months (which fortunately never had to occur). Also, according to Bergelson, "We wanted to keep all our core staff, but we had a contingency plan for possible layoffs just in case."

Basically, Audium did anything and everything it could that didn't cost more but pushed the company ahead, so that everyone in the firm was either building the product or selling it.

Ultimately, due to their progress and focus, Audium was able to close a bridge loan from investors on the back of a term sheet that was signed a month prior to being OOC. A few months ago, the investment round was closed, and Audium is alive to tell the tale.

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This article was originally published in the October 2001 print edition of Entrepreneur with the headline: Restructuring a Problem Company.

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