Some businesses start out small but over time, grow to occupy more space, add employees, increase capital expenditures for equipment, technology, marketing or raw materials, acquire other companies, and take on new and bigger goals. But often the basic business processes do not keep pace with growth. Management, too busy with the day-to-day, may neglect the company from a financial or operational standpoint. The result? A company that is in distress with a prognosis that can range from “We can turn this around,” to “Sorry, this company can’t be saved.” Recognizing relevant issues and implementing solutions can possibly keep a business…in business.
Here are some of the common issues found in troubled company situations:
- Poor accounting practices and weak financial reporting. Nearly every company that experiences financial distress utilizes poor accounting practices that lead to a lack of timely, detailed, and accurate financial information. There often is not a clear correlation between financial reporting and operational reports, but the combination of both in the right form supports a more profitable business.
- Poorly designed operational workflows which become overly complicated. Over time, cycle times increase for design and engineering, production, and customer delivery. Management needs to ask: “How does the operational floor look and how efficient do operations appear?” Sometimes the answer is obvious, as when it appears disorganized, it is disorganized. Think in terms of Five-S and LEAN practices: Sort, Set in Order, Shine, Standardize & Sustain. “Are there good measurements in place and daily reporting?” Some very simple process improvements can have a dynamic effect on productivity.
- Procurement practices are not carefully managed. It is too easy for controllable costs to increase when business is very profitable. Material costs, production services, and administration expenses can easily increase without close monitoring. Packaging materials, including boxes, labeling, print materials, and marketing services are areas where costs incrementally increase each year without meaningful oversight. As a result, this is usually an area of simple and quick savings.
- Logistical costs and product movement costs are not closely managed. Product movement costs can become disproportionately high in relation to product costs, because of a shift in volumes or a customer accommodation. And suddenly a product line is no longer profitable. But management continues to assume the product is making money, if even on the margin. Instead, the marginally profitable product line that was helping to support higher production volume is losing money.
- A lack of benchmarking to peer groups or to historical performance. Production costs components and administrative costs get out of sync with key drivers to profitability. Companies lose sight of gross margins and overhead in relation to sales.
- Cost accounting and product cost analysis are frequently a lower priority. But for many businesses it easy to lose track of cost to product and an increasing variance against original targets. Sometimes the answer is that costs have gone up and it is time for a price increase. Do not be shy, customers will push back but ultimately know you need to be profitable to continue as a supplier.
- Temporary labor and over-time are used to control headcount but turn out to be a higher overall cost. There are frequently opportunities to better manage over-time and to negotiate better rates on temporary labor. Also, it is important to have a standard operating procedure in place of when to convert temporary employees to permanent.
- In-house versus outsourcing and third-party logistics. High growth sales and marketing companies frequently try to quickly build their own infrastructure which results in higher than standard production costs and a high cost distribution network. Can the company really be best in class in all aspects of its business? It is an important analysis and sometimes biased when performed in-house. With the dramatic shifts in business models, it may be more profitable to never touch the product and make a third party accountable. Instead, be expert in design, marketing, costing, sourcing, and customer management.
- Recognizing the need to decrease workforce or close facilities may be the only way to rescue the company. It is hard to resize the business after so much effort was expended to build it up. Management never wants to do lay-offs or implement a Reduction in Force (RIF). They never want to close store locations or warehouse facilities. A successful business requires an ongoing 360-degree view of finance and operations and a willingness to quickly sort out issues that, left unresolved, may lead to failure.
EMAGroup advises companies in transition, focusing on Special Situations, Capital Solutions, Enterprise Performance Improvement, and Insolvency Strategies to create value-driven solutions. For more information, visit: https://www.ema-group.com.
