Step 10 in Avoiding Bankruptcy – Determine Your Current State of Health
In a study of over 1,500 companies that we have assisted, I have concluded that the maintenance of organizational health is a dynamic process requiring constant attention. A leader cannot merely set up the structure of a company and forget about it because it will not run by itself. In the United States, the vast majority of organizations fail. If we could uncover the secret of long-term success, we could unlock the door to enormous economic expansion by redirecting all of the resources currently devoted either to trying to save or to close failing companies.
Let's begin by asking ourselves "What time is it?" at your company. Organizations with long-term health ask this continuously. To answer the question, I refer to the concept of the Corporate Clock and explain how to tell time on it.
The actions you must take to restore health are a direct response to your position on the clock. A company in crossroads has more options and a longer time-span to achieve results than one in crisis and their actions will be quite different.
The following short test will help you evaluate where your company is on this Clock. The 22 key questions enumerated here have been excerpted from a more comprehensive questionnaire that KGI uses in performing this analysis for our clients.
If the answer to any of these 22 questions is NO, then your company is probably not in the Healthy quadrant. Here are some preliminary guidelines:
In general, if your current ratio is less than 1.5 and/or your debt-to-equity ratio is greater than 2.0, you may not be Healthy even if you answered YES to all 22 questions. I must admit, however, that I do not know of any company that has answered yes to all questions and still had weak financials. Finally, if you have a negative working capital (current ratio under 1.0) and/or a deficit tangible net worth, you are in a crisis irrespective of the answers to the questions.
So, where are you on this Corporate Clock? Do you rate your organization higher or lower than the test results indicate? We usually find that owners and executives tend to be optimistic and are unhappy with the test scores, while professional executives tend to be more realistic.
If I could work with an inventor and design Corporate Clocks for sale, business and professional people would build a pathway to my door. The clocks demonstrate that time accelerates as companies deteriorate. Time in the Crisis Zone moves thirty times faster than in the Health Zone.
In the Healthy quadrant, everything is in control and going well. There is plenty of time to correct any future problems that might occur. In addition, in the Healthy phase, the company has developed Strategic and Contingency Plans, and so is better prepared for emergencies. There is, in effect, an upward spiral. The company in the Healthy Zone has more time, more resources and more awareness, while the company in the Crisis Zone has little time, limited resources, and no awareness. The company in the Healthy Zone is able to work with monthly Cash Flow, Balance Sheet, and Profit and Loss information to maintain control. The information is timely and meaningful so that corrective action is being taken continuously to avoid drifting into the Crossroads Zone.
The company in the Crisis Zone must work with daily Cash Flows and daily information related to all critical assets such as Inventories, Accounts Receivable, and Accounts Payable. The information is generally late. Corrective action usually is not taken because it is difficult to determine, through the information system, where the problem exists.
A more detailed description of these quadrants can be found in my book, The Value Creation Bible for the Mid-Market.
This completes the series related to the Ten Steps.
You now know the secret of staying healthy and Avoiding Bankruptcy. I suggest you re-read them at least once a quarter. It is all too easy to get caught up in the moment and fail to see the forest from the trees.
Optimism is the essential trait of leaders. False optimism, which is a form of denial, is a primary cause of failure. It is the "pathfinder" who knows the difference. Blame the economy, the government if it satisfies you, but the true leader uncovers the opportunity that is created by uncertainty. Perceived with a creative perspective, uncertainty can be the catalyst for a new beginning. The capitalist system will always have its ups and downs – don't fight it – thrive on it instead.
Whether a Company is struggling financially or on the cusp of breakthrough growth, KGI can help. Our seasoned experts work alongside management to solve complex cash flow issues, operational challenges and other business crises. If liquidity or sale is needed, KGI provides a powerful combination of services and expertise to achieve outcomes that cannot be duplicated by other standalone consulting firms.