Manufacturing Articles
The Business Back-up Plan
Author: Uwe Manski
Date: May 2010
Publication: Canadian PLANT
Managing a business through continuing economic and market upheavals means few manufacturers these days are finding the time for contingency planning. When dealing with daily competitive pressures, however, serious challenges can arise unexpectedly. Falling profitability. The inability to secure financing or a plunge in cash flow. Even the sudden illness of a member of the management team – any of these situations can lead to a crisis that can immediately threaten the viability of a manufacturing operation.
This is how Hugo, the owner of ZYZ Manufacturing found himself facing a precarious financial situation. Despite the company’s rising sales, he learned that cash flow was rapidly deteriorating as a result of aging accounts. Lacking someone internally with sufficient experience to address the situation, Hugo asked several colleagues for advice and was referred to an interim manager with extensive experience in collections and troubled accounts receivable. After meeting the next day with management as well as bookkeeping and accounting staff, she immediately began reviewing the company’s credit policies and procedures. The interim manager quickly determined that while ZYZ had established credit limits for new customers, the company had not established accounts receivable aging limits. The result was a dozen accounts with payments outstanding more than 60 days. This isn’t unusual during times of economic uncertainty when customers struggle with their own cash flow issues, yet this is also when suppliers have to be most proactive in collecting payment.
The interim manager immediately instituted a focused collection process on all accounts over 45 days. Within a month she had collected $160,000 in outstanding accounts. She also established new policies for credit and aging limits and trained the ZYZ team to implement the new system. And she set up a few simple processes for management to monitor aging accounts receivable and related cash flow on an ongoing basis.
The ZYZ example demonstrates why more business leaders are seeking interim management support to prevent or address serious predicaments. Without the time or resources to prepare comprehensive contingency plans, internal management teams are more often calling upon interim management for timely, practical solutions for pending or immediate emergencies.
Unexpected illness, disability and even death among management teams, for example, are becoming more common with Canada’s large proportion of aging baby boomer business leaders. When the general manager of ABA Manufacturing had to have emergency heart surgery, for instance, no one else within the internal management team had the requisite expertise to fill in while he was on medical leave for several months. The company’s banking representative referred the team to an interim management firm which provided an executive with extensive experience in the manufacturing sector. Interim managers typically have years of specialized industry experience as well as professional expertise in areas such as: auditing, assurance, financing, tax planning, operational efficiency, mergers and acquisitions, restructuring, and business and insolvency law.
Within two days of the general manager’s surgery, the interim manager joined ABA full-time, assuming all of the GM’s duties. He took control of the company’s multinational manufacturing and sales operations, managed the accounting team, worked with department heads to ensure that production targets and customer commitments would be achieved, and provided strategic leadership and guidance to the other members of the management team.
Interim managers may work individually, or, when complex operational and financial challenges are involved, as a team of specialists, each with a specific discipline, to develop integrated solutions. Thus when ABA had to negotiate several important overseas contracts, the interim management firm also supplied a tax specialist with transfer pricing expertise to assist the interim manager and other management team members in devising tax-efficient arrangements. Three months later, when the general manager returned to work, the contracts were in place, ABA had met production targets and customer commitments, and the company`s finances were sound and in line with forecasts.
Serious financial challenges are among the most common reasons why business leaders seek interim management assistance. As in the ZYZ situation, cash flow may be impaired through systemic or operational inefficiencies. Often, companies may need additional capital to manage through a period of low or no cash flow. Yet businesses in these situations are often unable to access needed financing from traditional lenders. Depending on the severity of the financial challenges, sometimes an immediate intervention may be necessary to save the business, requiring the protection of the Bankruptcy & Insolvency Act or the Companies Creditors Arrangement Act. In such cases, an interim manager can identify the best alternatives to preserve the value of the company, negotiate with lenders and creditors and implement remedial strategies.
In other cases, a company’s performance may be trending downward and the internal management team may be unable to identify or control the causes, as happened in ZYZ’s situation. While the interim manager implemented protective measures to reverse the trend, she also identified additional areas within the organization that presented opportunities to enhance performance and profitability, including numerous enhancements to the billing process.
When business doesn’t quite go according to plan… it can be reassuring to know that interim management is available as “the back-up plan” offering viable alternatives and practical solutions to guide an enterprise back on its path to success.
Uwe Manski, FCA, FCIRP, CMC, who is based in Toronto, heads the interim management division of BDO Canada Limited. Phone 416-369-3072 or e-mail umanski@bdo.ca.
