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July 1992

Applying economic CPR to a distressed company.

by Ryniker, Roy S.

    Abstract- There is increasing demand for CPAs as providers of immediate crisis management services to financially distressed businesses given the recessionary economy. Providing help starts with diagnosing whether the distressed firm is suffering from a liquidity shortfall or from the more serious problem of a viability imbroglio. Once the company's situation has been determined, CPAs can then help apply 'economic CPR' which is a three-phase process. The first phase involves applying cash and expense controls, including management report analysis, cash flow control and expense management. The second phase has to do with the development of a longer-term strategic plan for the stabilization of operations and for facilitating the long-term recovery of the firm. Recovery phase, the final phase, entails the execution of the operational restructuring plan and the planning of a viable financial structuring program.

Economic CPR is applied in three phases: Control, developing a strategic plan, and recovery. When successfully administered, these three phases will take a company from a state of crisis - perhaps reconfigured - into an organization positioned to effectively compete in its chosen business segments.

As with a physician, a CPA needs to diagnose the ailment before applying economic CPR, This diagnostic approach is to determine the cause of the ailment and not just to report on its symptoms. Managers frequently complain that their problems arise from not having enough cash to pay current expenses. Too often the management of a distressed company will simplify their own recovery program by stating, "If only I had some additional capital, all these problems could be rectified."

A distressed company's problems need to be assessed for their root causes and not from surface symptoms followed by a utopian recovery, plan. The diagnosis is to determine if the company is suffering from either a liquidity shortfall or a viability imbroglio or crisis. The liquidity shortfall is a condition where the company suffers from an inappropriate capital structure given the nature and level of its operations, from weak management of working capital, and/or a loss of critical trade credit. Company management and operations are otherwise generally effective, and its products and services competitive.

What is a Viability Imbroglio?

A viability imbroglio is a company in structural disarray with core problems involving management, competitiveness of products or services, and effectiveness of operations. In addition to the financial resources, this crisis is associated with a company experiencing a liquidity shortfall. The company's raison d'etre may be questionable, and its survival will often be the result of short term strategic decisions concerning product or service support and positioning. The future survival of such a company is clearly in question.

Company management will more readily agree with a liquidity shortfall diagnosis than be willing to address issues that deal with a significant reconfiguration of current operations. The reticence of management to deal with true viability issues is due primarily to vested interests such as existing products and services. There is also the inherent difficulty of self-assessment in identifying management problems.

Business turnarounds often require tough decisions, made more difficult by having to face viability issues such as the strength of existing management and the continued marketability of specific products or services. Diagnosis of the current condition should be based on an understanding of the strengths and weaknesses of the operational, financial, and human resource functions. Because advising a business through a full-scale viability imbroglio includes the skills required to rectify a liquidity shortfall, this article addresses the more serious viability imbroglio.


After diagnosing the company's current condition, it is time to expeditiously apply economic CPR. To cure the life threatening disease, fueled by the operating losses ravaging the company, cash and expense controls must be applied immediately.

During the control phase, time horizons are short-term. The situation requires informed action initiatives, successfully implemented. Specific control techniques include:

* Management Report Analysis. Analyze existing management reports as the foundation for discussions with management personnel. identify existing operational and financial problems related to sales, operating margins, and profitability trends, as well as to all non-recurring income and expense items.

* Cash Flow Control. Set up controls on all cash transactions. Develop detailed daily, weekly, and monthly forecasts. Prioritize cash requirements to be funded, in what order, and in what amount. Accelerate the receipt of cash through aggressive working capital management techniques, including for example, collecting all receivables, liquidating obsolete and excess inventory, and selling non-strategic, non-operating assets. Although the cash generated by enhanced working capital management may be a one-time only exercise, the operation is provided with immediate additional working capital. * Expense Management. This does not mean just cutting costs, but rather, managing the demand for the goods and services that are the cost generators. Not only should you inquire as to which expenses can be eliminated, but for each major expense category you also need to ask, where opportunities exist to combine, substitute, eliminate, or reduce the content, quantity, and frequency of activities which generate costs. Capricious cost cutting initiatives often threaten a company's survival when critical staff, products, and markets are abandoned without proper analytical reasoning and support for those decisions. The larger and more capricious the cuts, the greater the likelihood the patient will the rather than be rehabilitated.

During the control phase, GAAP goes on vacation. Operating emphasis and financial or management reporting are based on cash generation, not GAAP reporting. Just as a patient requires healthy blood to survive, cash is needed to run through the veins of a business organization to insure its survival. The management and monitoring of a company's cash position constitute the cornerstone of a business recovery plan.

Establishing a cash flow management system requires dedicated experienced personnel; it is not a task delegated to a junior associate. just as blood is screened for type before a transfusion, the cash flow system must be examined for any biases, and then it must be appropriately administered. The management of each business segment must be responsible for providing their own input data and be held accountable for variances between actual and projected results. This gives emphasis to the immediate need for managing the business for cash generation rather than reported earnings.

An effective crisis cash flow management system needs to detail cash receipts, disbursements, and current balances related directly to the changes in accounts receivable, accounts payable, inventory, capital expenditures, and loan balances. To support this cash flow reporting, additional information should be included on sales and backlogs, operating margins, and staffing levels.

Developing individual break-even points for the various products and services produced assists in identifying the magnitude of the corrective actions required. Also helpful is analyzing the trend of different costs relative to sales levels. For example, how have changes in wages and benefits, staffing, and selling expenses compared with the absolute level of sales? What, if any, are the reasons for discrepancies in the trends identified?

The control phase is also the time to communicate to all the company's constituents that a rehabilitation process has begun, that a competent management team is leading the restructuring effort, and that they will be kept informed of developments as they occur. For example, creditors can deal with good and bad news but abhor no news. other interested constituents include not only shareholders, union officials, regulatory personnel, and major customers, but also employees. Employees must be provided as soon as possible with information to alleviate their key concerns, "How do all of these changes impact me? Should I look for another job?"

In the control phase, the issue is not long-term survival, but rather, the implementation of action plans to provide for immediate continued existence and to develop a strategic plan to help assure that the company will have a tomorrow.



In the control phase, the actions taken should have resulted in stemming the losses threatening survival. The next phase is to stabilize operations and position the company for long-term recovery through development of a longer-term strategic plan. These techniques involve determining the answers to several key questions: Given the company's financial capital, human capital management and staff), and physical assets (equipment, plants, etc.), in which of its business segments can it effectively compete long-term? What resources are required to take the company from its current condition to its desired long-term competitive position? Is it reasonable to assume that the company can acquire the needed resources, in the required time frame? What restructuring is required to generate the required resources to support the continuation of profitable business components?

Management needs to determine what products or services the company can provide in a long-term competitive fashion. Answers cannot be developed in a vacuum, but must include analyzing the differences between the company and its competitors for each product or service it provides. This analysis requires addressing some of the following strategic issues:

* Scale of operations and associated production costs;

* Profile of customers, target market, ability to effectively penetrate new markets, and their relative attractiveness,

* Scope of each competitors product or service lines and their financial capability to adequately support each activity; and

* Extent and associated costs of customer support provided for each product/service,

By addressing each of these strategic issues, against a background of the company's current strengths and weaknesses, the company can evaluate effectively where to compete in the long-term. Converting resolution of strategic issues into action programs often involves operational restructuring such as: divesting entire subsidiaries, divisions, and/or product lines; redeploying certain fixed assets to support different products/services; or the formation of joint ventures or other strategic alliances with third parties. All asset disposition plans need to be developed within the confines of tax, accounting, regulatory, and economic considerations.

The company's strategic issues and long-term viability need to be assessed on a segmented basis. While the detail is company-specific, possible units of analysis could be by subsidiary, division, market, product, service, and geographic location of customers.


In re-positioning a company for the long-term, the company's financial restructuring must be in harmony with the operating plan and its associated risks. Therefore, a well developed operational restructuring program is an essential precursor to an appropriate financial restructuring plan. The recovery phase of a distressed company's turnaround program involves the full implementation of the operational restructuring plan together with the development of a sound financial restructuring plan.

The financial restructuring plan has multiple objectives:

* Achieving a capital structure consistent with required operating cash flow and capital expenditure requirements;

* Maximizing the value of the restructured entity;

* Providing flexibility, to adjust to changes in the company's operating environment and the ability to capitalize on future opportunities;

* Satisfying the cash requirements of creditors; and

* Providing an attractive investment opportunity for potential new investors.

The process of achieving each objective involves analyzing relative benefits of several restructuring options which include restructuring the terms and conditions of bank debt, subordinated debt, and trade debt; having existing creditors or shareholders advance additional capital; selling existing assets; attracting debt and/or equity capital from new investors; and filing for bankruptcy.

Through a combination of these restructuring options, a financial restructuring plan is developed. Its form is a function of the appropriateness of each alternative to the company's particular situation, their economic attractiveness, and where necessary, the feasibility of reaching a consensus among different creditor groups on the acceptability of such a plan.


Having successfully administered economic CPR, the patient will survive, and the company will be back as an economically viable organization. As in the control phase, the company's constituency should be informed of what is happening. The recovery story needs to be communicated to employees, suppliers, creditors, and the investment community. The support of all constituents can be a vital component in accomplishing a successful and lasting rehabilitation. This support can be achieved through the development of an opportunity profile.

Distressed companies are often associated with negative images concerning their performance and long-term viability. The opportunity profile focuses on communicating the attractiveness of supporting this revitalized company. This profile, described in the following paragraphs, highlights the company from four perspectives.

1. History. A description of the company's history, its recent problems, and how those problems developed.

2. Corrective Action Taken. Details of corrective actions implemented to rectify the problems.

3. Progress To Date. An illustration of the quantitative and qualitative impact of the recovery plan, successes to date and future plans.

4. Strategy For The Future. A description of the revitalized company's strategy, its primary products and services, and its strengths relative to the other players in the markets where it has chosen to compete.

By illustrating that the company's management understands the cause of the problems, interested parties can get more comfortable with the idea that the company is able to avoid a repeat of mistakes. In addition, the opportunity profile, by illustrating prior performance and details of the recovery plan, will serve to foster credibility in management's proposals for the future.


With the economic CPR process, costs are all short-term and the time allocated for recovery will be probably take longer than initially anticipated. Good news will be slow in developing relative to bad news that seems to be express. delivered. Just as the final version of the recovery plan will be changed at least three times, so will the proposals from creditors critical to the plan. Just as the company has never been in such distress before, so too, never has its relationship with bankers and trade creditors been of the nature it is today; prior accepted operating norms no longer apply. As such, do not hesitate to be aggressive in seeking assistance from these creditors.

Oftentimes, management associated with a distressed company is readily willing to address the blame for current depressed conditions on some outside factor, whether it's the economy, competitors, the credit policy of suppliers, bankers, decisions of prior managers, or excessive regulatory requirements. Often the mindset is that everyone else contributed to the distress. what must be instilled in a management team is a renewed sense of responsibility.

The easiest way to predict the course of future events is to take a pro-active approach to assist in creating that future. Distressed company officers also have to apply a pro-active management style along with the associated rights, responsibilities, and rewards if an effective recovery is to be implemented.

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