Every CFO's worst nightmare is undoubtedly a situation where the company's liabilities far outweigh their assets and liquid cash. Moreover, not every company that finds itself in this sticky position is doomed. Most often, companies just need to implement a few rescue mechanisms to pick themselves up. Admittedly, there are a handful of companies that will not be able to sustain even if rescued, perhaps because their business proposition is flawed and they are not performing well. But most companies - especially those that are experiencing good demand for their product or service - have the potential to bounce back if they manage to overcome the hiccups at hand.
In most cases, companies that find themselves unable to pay off their debts on time complain of one or both of the following problems: It is possible for example that the company does not possess enough scale and operations to meet liabilities, even though they are making profits and business is doing reasonably well.
The second catch-22 situation that a company might find itself in relates to assets that might look fantastic on paper, but are realistically, not a viable means of rescuing the company from financial difficulties here and now.
In both situations it is clear that the company's business is performing well. Its volume of business allows it a degree of financial stability - not to mention optimism - but it experiences regular cash flow issues or is undergoing one currently due to a rough patch such as a change in government policies, increased taxation, a development that changes market dynamics or due to another company gaining a competitive edge. The company might even have the ability to race ahead of the said competitor, if it can only navigate its current cash flow issues.
CFOs should note that this situation is not uncommon. Facing up to an impending or ongoing cash flow problem is the first step to triumphing over the roadblock and in preventing insolvency in the long term.
Under no circumstances should financial heads panic. Maintaining a balance and implementing a well-thought-out, long-term strategy is the key at this stage. Hasty decisions such as diversion of funds could land another area of business in jeopardy and create a new set of problems. Worse still, moving funds surreptiously or calling for new funds citing a new project and utilising them towards rescuing the business are common knee-jerk reactions that could compound the situation (nobody wants investors questioning the company's integrity, for example). Experts also caution against preferential settlement of debts, which must always be settled in order of due date.
Instead, CFOs should work with project heads and various departments to reassess individual business plans and eventually, rework the company's overall business plan. Take special care to ensure the new plan is sustainable with the current debt-credit situation - remember that it is important to sit tight on cash at this juncture without compromising on sustained operations. The next step is to improve the company's debt-credit situation by identifying a sustainable debt ratio and sticking to it - at least until the company is out of the red. These moves ensure that the situation does not worsen while the CFO fixes it.
Now to fix the current cash flow problem: Liquidating non-core assets is a smart way to free up funds to pay off your debts. You might have invested in these with long term plans in mind but under the current circumstances, they are only adding to the load so drop them in favour of a rescue float. The same rule-of-thumb applies to excess inventory in storage. Be clear with members of management linked to the purchase assets and inventory that this move does not question the strength of their judgement at the time of investing in these assets and inventory so as not to alienate, undermine or demotivate them. Working as a team with the singular goal of returning the company to good financial health, is imperative at this stage. You definitely do not want unwanted publicity - especially from voices emerging from within the organisation - doing the rounds in the market because it is important to keep the wheels turning on operations and to sustain demand for your product or service while you fix your financial situation.
Your debtors could also turn into the wind beneath your wings if you can motivate them into paying up. You could perhaps even incentivise them to settle their debts earlier than committed by offering them a discount. This is understandably not desirable under normal circumstances and you might face disagreement from the sales head who negotiated the deal in question (she or he does have targets to meet) but keep the bigger picture in mind.
Of course, it is a challenge for those closest to the business to make tough decisions, especially when it comes to axing perfectly laid plans. Alternatively, an outsider, could provide the unbiased opinion that is critical at this stage. Additionally, a third party's decision to sell assets/ inventory or to discount deals would, in all likelihood, be looked upon more professionally and less as a personal attack by internal stakeholders. Call upon an external auditor or a consultant that inspires trust and displays knowledge and work with them on a solution that can restore balance without creating too much havoc with the company's plans for growth.
(The author is Partner, Business Restructuring Services at BDO India.)