Troubled Companies

The following text has been prepared by Arthur Lipper III for British Far East Holdings Ltd. and is intended to be part of a book, “Troubled Companies”. No reproduction or publication of these writings is authorized, except with written consent of the author and owner. __________________________________________________________

Chapter 1

The Warning Signs of Possible Company Failure:

It all starts and ends with customer satisfaction. Customers make commerce work and companies must be able to identify and satisfy their customers.

Initially, in the case of development stage, pre-revenue, companies, the customer of the company are the owners of the business. However, the owners can only be satisfied and achieve their objectives if the company begins to have real customers who pay for the company’s products or services and thereby generate revenues.

When companies falter it is the customers who first sense the change. It may be in management responsiveness, product quality, delivery reliability or quality of communications. Customers are instinctive in their sensing of trouble. Customers will manifest their awareness of change differently or perhaps not at all as change is generally threatening and the first and somewhat amateurish reaction to a sensing of change is denial or non-questioning acceptance.

Therefore those in a position of needing to know about the health of the company must be in contact with the company’s customers on a sufficiently regular and intimate basis to collect the data - without alarming the customer.

Competitors will also sense negative change early in the process as they are ever hopeful of gaining a competitive advantage by seeking to identify and magnify problems. Therefore, those responsible for marketing and customer contact will hear of the negative or questioning statements of the competition early in the process of trouble onset - if they are as close to their customers as they should be.

Assuming the form of trouble is financial, as it certainly will be should it continue, the Chief Financial Officer, assuming proper budget variance programs are in place, will know early in the process if the planning of cash flow is in risk of attack and change.

Who is likely to be the last to learn of impending trouble other, of course, than the investors, frequently it is the in-house visionary, the CEO. Why? Because he or she is so focused on what is to happen next the current realities slip - and he or she doesn't want to hear of them in any case as the problems are a disagreeable threat to achieving that which has been predicted and promised.

Warning signs such as not having sufficient cash to make payroll are not useful as a warning as the boat is already sinking. We are looking for much earlier signs of trouble as the sooner trouble can be spotted the sooner it can be dealt with effectively. It must also be remembered that getting off the ship is frequently a safer alternative than trying to fix it and there again the earlier one heads for a life boat the more likely there will be found one in which there is still room.

One of the primary reasons to study business plans and budgets is to be aware of the variances from plan and to chart them, mentally if not on paper. Are revenues what they were predicted to be? Are profit margins as good as were predicted? If not, why not? There are always excuses and reasons for not making plan - and sometimes it is the lack of reality in the plan which is at fault. The key to survival in companies not achieving predicted results is to make changes, frequently drastic changes, early in the process and not to wait for good things to happen. If a manager believes the sales projections his or her sales department provides they deserve the results like to befall them.

It is most difficult for sales people to assign valid probability numbers to their projections as their own customers and prospects so frequently provide inaccurate data, either because they themselves are unable to predict due to their company’s own problems or because they too are optimists - always hoping for the best. If you believe your own sales people then you had better have sufficient capital in the business to continue the operations for longer with less revenue than is contemplated in the plan. Hope for the best and plan for the worst is good advice - and seldom utilized.

It is superficially more difficult to assess publicly traded companies than privately owned companies as the publicly traded company is typically prone to disseminate favorable press releases whenever the opportunity is present. I know of lots of public companies where writing bullish press releases is what the CEO thinks he does best - and certainly enjoys most. For awhile, because of all of the good expectation stuff floating around it isn’t easy to spot rouble early enough. Of course, it could be that simply the flurry of favorable press releases, almost always dealing with anticipated future events is, in of itself, a great early warning signal. Perhaps someone will develop a ratio as between the number of words in press releases and actual growth of revenues (assuming there are any revenues). Such a word/revenue growth ratio would be an interesting comparative statistic. It is my experience there is an inverse ratio between those who really do perform and those who predict the will perform.

The problem and it is a problem as eventually reality will strike, of company CEO’s focused on the price of their stock is that anticipated market reaction to favorable news is factored into their money raising plans and “getting the stock up” becomes the CEO’s primary objective. I spend a lot of time exploring the downside of being public with the owners of successful private companies.

One other indication of companies leaning the wrong way, is the quality of people being hired. Are those coming on board giving up good positions or are they coming from being “consultants” or with less than distinguished companies or the government? Is the company devoting resources to executive and staff education and training? I believe there is a positive correlation between fast growing, successful, companies and those which have a relatively high investment in the education of the executives and staff.

Early warning signals must include; missed predictions, lessened interest by market makers and investment advisors, increasing cost of money and frequency of capital raising transactions and management changes. One has to be particularly aware of any change in the Chief Financial Officer or independent directors.

To recognize change one has to have a baseline or knowledge base point of departure on which to base comparisons. Knowledge is power. You have to know where you are and where you expected to be at this time to know where you are likely to go.

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Reader comments and suggestions as to specific examples are welcome. All submissions will become the property of British Far East Holdings Ltd. with our appreciation, but without compensation to the party making the submission.

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