Publications

Step 2 in Avoiding Bankruptcy Ė Create a Credible Current and Future-State Plan

Continuing this series of how businesses can avoid bankruptcy, I'd like to spend some time on the second step in The KGI System™ - Creating a Current-State and Future-State Plan that is Credible to Creditors, Vendors, Customers and Employees.

Vendors often become aware that a business has a problem when their receivables begin aging. Vendors hear rumors or make demands for COD deliveries which further exacerbates cash flow. If the rumors reach the potential customers they begin looking for alternative suppliers, which impacts revenue and cash flow. Smarter employees lose confidence in the business and quietly prepare their resumes while the less competent employees hold on for dear life as the downward spiral accelerates.

When a company gets into financial trouble, the secured creditor often questions the competence of management. Often, most plans that were presented to the lenders in the past have not been met and the lenders are not sure whether the core issue is poor management, poor planning or both.

Lenders do not like to be surprised and this is why the Plan must be accurate. The Plan must be accepted and believable by all interested parties because they are going to make important decisions based on the numbers. These decisions could affect the future of the business.

For example, forecasting increased sales would be a bad idea for most businesses in the current environment as even a flat level of sales would be suspect. Under current economic conditions it is important to demonstrate that the business has a survival plan even if sales drop by 30%-50%.

Why do some plans fail? What are the major issues?

  • The assumptions do not reflect the current-state.
  • The assumptions reflect the current-state, but the initiatives will not produce the forecasted result.
  • There is no connection with operations. The Plan is built from the top-down rather than the bottom-up and the balance sheet in incapable of delivering the future-state and achieving the forecasted cash flow.
  • There is a lack of proper cost accounting so that operating performance is impossible to measure.
  • The Plan ignores or shows a lack of understanding of the impact of the current economy and the competition.
  • There is a belief that management is incapable of executing the Plan.

The failure to produce a believable plan that demonstrates future viability is one of the major causes of business failure. The Plans must be taken seriously and be competently executed involving all levels of management. If the interested parties do not believe the plan they are often inclined to "throw in the towel".

At the heart of the issue is constructing a plan that ties to the realities of the broader economics and industry dynamics as well as the core operations of the business. To these ends -- and with the understanding that each situation requires specific attunement -- The KGI System™ advises the following principles for developing a credible plan:

  • Be conservative in the estimates. Establishing credibility is more critical than selling a palatable vision. Executives must resist the emotional temptation to convey an optimistic perspective that will make the near-term easier but will dramatically erode confidence if the 'better' results do not materialize.
  • Provide clear support for the assumptions. Provide a listing based on data, facts and reason -- not opinion -- as to why the assumptions are rational.
  • Consider external factors. Discuss and evaluate economic and competitive risks and show a direct linkage between these risks and the Plan. Too often, plans are isolated within the business and only consider historical trends. To the extent that a Plan identifies and incorporates broader trends and external factors, it is far more credible and accurate.
  • Tie the plan to current operations. Ensure that the current P&L and Balance Sheet matches the Planís starting point.
  • Show the Key Drivers through time. Often a Plan involves a significant resizing of the business and it is critical to show that the Key Drivers of the business are still achievable. For example, if the plan involves layoffs it must be shown that there isnít an unreasonable increase from 16 units produced per person/day to 23 units produced per person/day due to the reduction in headcount. Exclusive of any technological or other developments, an assumption that an average worker is going to 44% more productive is not believable.
  • Bracket the Plan. Once a Plan is derived, show a sensitivity analysis of what happens under a couple of basic changes such as if Revenues are +/- 15% or if COGS +/- 5% to the core Plan.
  • Perform a Breakeven Analysis. This is an excellent method to i) verify the reasonableness of the Plan by way of volume sold and ii) clearly articulate which costs are variable and which are fixed. In order to do both, management must have a firm grasp of those costs that are variable and fixed within each range of revenue and how they change with the continued growth or decline of the business. The most common mistake we see is the belief that costs are variable when, in all practicality, they are effectively fixed.

KGI's experience over the last quarter-century has shown that following these principles drives a more effective planning process and a more accurate Plan. By adhering to these principles management will find that it has achieved buy-in from creditors, customers, suppliers and employees and has the confidence to accelerate the turnaround process.

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.