THOMAS R. TIMMONS, President, Business Directions Inc.
The warning signs are there when a business begins to fail, but owners are often too close to recognize them, says Thomas R. Timmons. He was a partner with what is now KPMG Peat Marwick and has worked as a specialist in turning around troubled businesses for nine years. He counts among his successes Marine National Bank of Santa Ana. As interim president, he guided the bank back to profitability in 1986 and 1987. Timmons tells free-lance writer Anne Michaud about how to prevent the warning signs from becoming fatal.
How do you tell when a business is in trouble?
The sign that tends to come up first is that management can’t do what they say they’re going to do. In other words, they develop plans and forecasts for the business and continue to miss. That tells me that they aren’t aware of the factors that are pressing on the business.
They don’t know that the market has changed or that the products they’ve been issuing are no longer responsive to that changed market. Or they haven’t taken into account that the economy is such that this type of product is no longer in demand. Or they don’t understand that their production or manufacturing process has become so inefficient relative to the rest of the competition that they can’t produce products at a price that is competitive. Or they don’t understand that the morale in the business has sunk to such a point that there’s no motivation for people to work.
Another sign that most people look to--and it is a good sign, except it tends to be a very late sign--is lack of profitability.
That’s a late sign?
Yes, along with declining sales and erosion of stockholders’ equity.
A better sign, and it is sometimes overlooked, is a declining cash flow. A business has to be generating adequate cash flow to provide for success tomorrow. That starts going down often before the other signs come along. But management and ownership tend not to react to it the way they should. You see lots of situations where, when the cash flow starts being real tight, they borrow more money or take out a second loan on their house or do some sort of new stock offer. Unfortunately, they haven’t fixed the problem.
Tied into a cash-flow problem is another sign, the inability to convert accounts receivable or inventory to cash in a prompt manner. If receivables aren’t turning into cash, it can be because of a lot of reasons. It could be that the products are no good and the customers aren’t going to pay for them because they didn’t do what they were supposed to do. Or it could be that the sales force is selling the wrong products--using good selling skills to push products that really won’t work. It could be that the service department isn’t functioning properly. Or it could be that there isn’t proper screening of new customers. You’re accepting customers that really can’t pay for it, no matter how good the product is. Or there’s not a good collection effort.
Inventory terms are another sign. If you’ve been turning inventory eight times a year and it suddenly slows to four or five, there’s a problem. You’re buying too much or producing too much or not selling enough.
Another sign is having cash tied up in non-productive assets. It’s always amazed me that in problem businesses, you often find a too big and/or a too fancy office or manufacturing facility.
Another sign is the (accounts) payables are getting too old. That has a debilitating effect on the business. As vendors aren’t paid, and they become more concerned, it has a tremendous impact on the ability of a business to continue. There are not only the real credit problems but the attitudes of the world out there to the business, not wanting to do business with them anymore. It rubs off on the employees because they’re suddenly ashamed that they have to deal with these vendors. It really mushrooms.
The last sign--and it comes as a result of all the other signs--is low morale.
How do you prevent failures once you recognize problems?
The first preventive measure is a balance-in-management philosophy. One of the things that happens most often is you find a management that chases sales or market share at all cost. You find that particularly in businesses where the founders or the principals come from a sales background. There’s a belief that more sales will solve all of the problems. But that is not necessarily true, particularly if those sales aren’t profitable. There has to be a balance between achieving sales growth and maintaining profitability, controls and cash flow.
That leads to the second preventive action, which is to maintain adequate controls over cost and cash flow. I believe that it’s very common that businesses don’t even really understand what their costs are, that there isn’t a good cost system in place.
Maybe most important of all is to communicate internally with people from the top to the bottom. Most people have good ideas about business. Most people want the business to succeed.
The next preventive item is to ensure that we know what the marketplace wants. Not necessarily what we think it needs, but what it wants. The ‘90s are probably going to be the most rapidly changing decade we’ve seen, and it may keep going like that. Every decade may continue to become more and more change-oriented.
The fifth preventive method is to ensure that we’re getting information and counseling from people outside our organization. When a business starts to have trouble, people tend to draw walls around themselves.
Yes, but isn’t it important to keep up a good front?
Well, I’m not suggesting that you make public announcements, but most industries have trade organizations or professional groups. The organization I’m familiar with because I was a member for a number of years is the Young Presidents Organization. The benefit of it is the opportunity to sit down with other CEOs and compare notes, ask questions, and at times say, “Look guys, I have a problem. I don’t know who else to talk to about this.”
Often times, when you look at a problem fresh you can see that it rests on one person or one product. But the president is so close to it he just can’t see--or won’t see.
On resistance to change. . .
“There’s a tendency for people to say, ‘Doggone it, this product was right five years ago, and it went great then, and it’s right today.’ ”
On competition. . .
“Business is more competitive now than ever, and global is the key. It’s no longer that the business in Costa Mesa is competing with the business in Santa Ana.”
On managing morale. . .
“If (employees are) seeing signs that things aren’t working, and they’re told, ‘Things are working, you just don’t know what you’re really seeing,’ that leads to morale problems. Low morale in a business is a very valid sign of problems. Usually, there’s a lot behind that.”
On the key to success. . .
“The one difference between a successful business and businesses that aren’t successful is the ability to generate positive cash flow from the business operations.”
