Our Top-Ten Action Steps For Interim CFOs Of Troubled Companies

Budget Finance Cash Fund Saving Accounting Concept

Troubled mid-size companies often need to augment their existing Accounting Manager or Controller with a more heavily experienced interim CFO to guide them through a financial crisis.  In such times, the new interim CFO’s learning curve is steep and needs to be Fast Tracked.  Here are our top-ten action steps to Fast Track that in-bound transition.

  1. Gain an understanding of the accounting department. As the saying goes, “You go to war with the Army you have, not the Army you wish you had.”  Therefore, one of the first tasks for any incoming interim CFO would be to meet with as many people in the Accounting department as possible.  The objective of each meeting would be to: (1) to put people at ease; (2) to gain an understanding of their backgrounds and skills; and (3) to instill or reinforce the proper ethical “tone from the top” behavior.
  2. Gain an understanding of the payroll process. Payroll is the number one mission critical process in any company. It has to be 100 percent correct, 100 percent on time, 100 percent of the time.  The new interim CFO should get a hands-on understanding of how it works, sitting with the Payroll Manager and clerks and mapping out the process, especially how Payroll is funded and what the CFO’s role is in making that funding happen each pay period and how payroll taxes are paid.
  3. Determine where cash is coming from. Keeping funds flowing is key to keeping a troubled company afloat.  To gain an understanding of the cash inflows, the new interim CFO should obtain a list of all customers sorted in descending revenue order as well as an Aged Accounts Receivable Trial Balance.  Meet with the sales group, get a handle on customer retention probabilities (for forecast purposes) and payment terms.  Not all customers pay on a monthly or 30-day basis.  For example, some licensing agreements call for payments each quarter.  In another example, it is common for certain industries (e.g., not for profits) to string vendor payments out to 60-90 days.  In addition to understanding cash inflows from customers, the new interim CFO will need to understand where the company stands on its availability to tap into credit lines when necessary.
  4. Determine where cash is going to. The other side of the coin is to understand where cash goes.  The new interim CFO should start by looking at an Aged Accounts Payable Trial Balance.  Speak with the Purchasing people.  Find out which vendors are key suppliers, and if there are any large purchase commitments hanging out there.  During difficult times, those key suppliers might be more flexible in negotiating longer payment terms rather than losing a key customer.  Determine who has the relationships with those vendors and have them open up discussions to attempt to obtain more flexible payment terms.
  5. Identify outstanding tax issues.  In troubled company situations I hate surprises and surprise tax issues are usually lurking in any troubled company.  Most likely they will pertain to audits or unpaid operating taxes, including sales tax and payroll taxes as compared with income taxes – since there probably is no income.  Unwinding operating tax issues can take significant amount of time and may result in settlement payments that drain company resources.  Nevertheless, it is something an interim CFO will need to identify and begin to address early on.  Tax authorities are more willing to work with troubled companies on developing payoff schedules rather than causing massive layoffs.  They may even be willing to forego a certain portion of the debt if the Company is working with them in good faith.  By the way, debt forgiveness may give rise to a taxable event.  Something the interim CFO should be aware of.
  6. Gain an understanding of the accounting software environment. The new interim CFO will need to gain an understanding of the Accounting software environment early on.  The interim CFO may not actually produce special reports, but will need to know what is available in the system and how to ask someone to get at it for special analysis purposes.
  7. Strengthen internal controls. Coming in as an interim CFO provides a good opportunity to look at the existing internal controls with a fresh perspective toward strengthening the controls during the interim tenure.  Consider that during distressed times, there is more impetus for theft and fraud.  The interim CFO needs to be especially diligent that none of that occurs on his or her watch.
  8. Analyze the Balance Sheet accounts. The single most important part of turning a troubled company around is to get a true financial picture of the situation.  Prior to an interim CFO’s entrée, management may have been hiding losses and those losses might be hidden in obscure Balance Sheet accrual accounts, particularly as credits.  The risk of this occurring may be higher in private companies and those with a regional business unit structure with local accounting groups.  Unwinding hidden losses is completely necessary for the Board and management to come to grips with reality.  Therefore, Balance Sheet account analysis becomes a high priority early on – not just for the year-end audit.
  9. Reforecast the financial picture going forward. While the Balance Sheet account analysis will provide a better picture of the current financial position, it will also be necessary to reforecast the P&L going forward based on realistic assumptions.  In our experience, management usually prepares unrealistically positive forecasts with an optimistic disbelief that the troubles will be long or deep.  Sometimes they are simply in a state of denial.  Therefore, it will be entirely necessary for the interim CFO to prepare a financial reforecast that uses realistic assumptions – and it usually takes an outsider with a fresh perspective to do that.  At this point, it will also be necessary to prepare a Cash Requirements Forecast.
  10. Reach out to bankers and other sources of capital. Once the interim CFO has obtained a clear picture of the situation from steps 1 through 9 above, then and only then should contact be attempted with bankers and other sources of capital. It is important for the interim CFO to establish credibility with these financial stakeholders and that is why the initial contact should be delayed until he or she has a better picture of the financial situation.  Furthermore, at that point better knowledge of the situation will dictate the discussion of additional capital fund raising requirements or covenant compliance waivers with these financial stakeholders.

© 2016, The Fast Track Group, LLC.

Our Top Ten Steps To Establishing Risk Management Procedures

The Wall Street Journal recently reported that Senator Charles Schumer (D, NY) is introducing a bill on Corporate Governance.  “One provision would require the boards of public companies to appoint special committees to oversee risk management, according to a draft of the proposed legislation reviewed by The Wall Street Journal.  The Securities and Exchange Commission is considering a rule that would require boards to disclose their role in managing risk.”[i]

While you might think that will not apply to private companies, think again.  Just like with Sarbanes-Oxley, private companies that have public company investors or lenders, as well as investment advisors and fiduciaries may well have to demonstrate their risk management procedures and show their documentation to auditors and their financial stakeholders.  In addition, risk management does not apply only to financial institutions.  While much has happened in the financial markets in this past year to evidence that many financial institutions ignored risk management, it applies equally to Real Estate companies, Manufacturing companies, Consumer Products companies, etc.
We have had significant and recent experience assisting clients to design, implement and document risk management processes. Here are our top-ten steps to establishing risk management.
1.      Ensure Senior-Level Commitment to Risk Management.  With all that has happened in this current economy, it should be obvious that many companies now on the ropes simply did not have their eye on risk management.  Many Board members increasingly concerned with director liability issues will be pushing hard for strengthening their risk management processes.  Ensuring senior-level commitment for risk management should be a given; however, it is a fundamental necessity for anyone involved in establishing or maintaining risk management procedures.
2.      Determine the Board’s “Strategic Appetite” For Risk.  Consider the Lehman Brothers or AIG Boards of, say, several years ago.  Their strategies were to get into derivative instruments, taking on huge amounts of risk with what they thought were reasonable rewards.  At the end of the day, it seems that they were not paid for the risks they took on given the ultimate consequences.  Fast forward and ask yourself, if you were a member of either of those Boards today, would you have the same appetite for the risks they took given the same rewards?  Probably not.  That is a simple example of what we mean by determining the Board’s strategic appetite for risk.  It’s OK to take on risk, as long as you know what the risks are and are fairly compensated.  Boards in the past did not. Boards in the future will need to be more mindful of their strategic appetite for risk.
3.      Identify the Risks To Be Managed.  There are several methods for identifying risk, including: interviewing key involved department heads; sending out questionnaires; etc.  The method we have found most efficient and complete is to get a cross-functional group of key executives all in a room at the same time and focus on one aspect of the overall business in a facilitated brainstorming workshop environment.  Then repeat that workshop for another overall aspect of the business until all processes have been completed.  We find that the interchange of discussion among the key players provides a more fertile process for identifying risk that sitting with one key person one-on-one in their office.
One important aspect to facilitating a risk identification meeting is that everyone’s ideas are important no matter how “out there”, especially when identifying potential risks.  I once attended a risk management seminar and one of the speakers was going on about the importance of planning for pandemic risks such as what we are witnessing with the Swine Flu.  Many people I know would probably have considered discussing such a risk to be a waste of time.  No longer.  The lesson to be learned from that is to be receptive to identifying a wide range new ideas concerning potential risks, not just the obvious ones.
4.      Prioritize the Risks Identified.  Once the risks for an area have been identified, and in the same meeting, prioritize those risks into categories of High, Medium and Low with respect to Probability of Occurrence.  In addition, create categories of financial impacts should the risk actually occur.  In that way, the higher and more costly risks can be prioritized for process redesign and presented in a color-coded format similar to the table that follows.
Risks Identified
Probability of Occurring
Impact if it Occurs
Weighted Priority
Various risks identified
High
High
High
High
Medium
Medium
High
Low
Low
Medium
High
High
Medium
Medium
Medium
Medium
Low
Low
Low
High
High
Low
Medium
Medium
Low
Low
Low
5.      Design the Baseline Risk Management Processes.  Once the risks are identified and prioritized, baseline business processes can be designed to mitigate those risks.  By “baseline” processes, we mean the processes for the core or largest components of the business with an emphasis at “normalizing” or standardizing the processes across as many of the core business units as possible.  This is especially important in a business that has grown through acquisition or where there are many offices or business units all “doing their own thing”.  In contrast, sound risk management processes require as high a level of procedural standardization as possible.
6.      Adjust the Baseline Processes For Business-Unit Operating Differences.  Once the baseline risk management processes are designed, they may need to be adjusted for legitimate business-unit operating differences.  By that we mean differences resulting from, say, operating in different countries with different laws and business practices or unavoidable differences between dissimilar business units that preclude strict standardization.  We call those “hard differences” because they are hard to overcome through standardization as compared with “soft differences” which are simply internal differences such as nomenclature or internal processes that vary from country to country or office to office that could more easily be standardized.
7.      Document All Risk Management Processes.  Process documentation will be necessary for training, to ensure ongoing compliance and to demonstrate to outside auditors and possibly even investors the procedural framework for the risk management processes that have been implemented.  We have developed our own very efficient approach for documenting risk management processes.  For more information on that, please visit our web site page, “Process Documentation” at FTG Approach to Process Documentation.  There you can follow a link to our white paper, “The Fast Track Approach to Process Documentation”.
8.      Implement IT Toolsets To Support Risk Management Processes.  If risk management processes are to be durable and efficient, they need to automated and supported by IT toolsets that make their compliance routine and mandatory.  For example, in a transactional compliance monitoring area, one would expect to see automated e-mail ticklers and automated reporting to highlight procedural compliance issues prior to actually funding a new transaction.  Any procedural non-compliance would automatically prevent funding.
9.      Conduct Training.  I have seen more issues of non-compliance excused because of a lack of proper training.  Moreover, I have heard something similar to the following many times over, “We didn’t train our people in these new procedures so it’s not really their fault that they are not in compliance.”  If there is going to be a serious effort at implementing risk management procedures, there needs to be an equally serious effort at training.  That should include some measure of testing to ensure that people demonstrate that they know what is expected of them and that the training was successful in communicating compliance expectations.
10. Monitor Compliance.  Compliance monitoring starts early-on after implementation with a walk through to ensure that the risk management procedures are functioning as they were documented and as expected.  That should be performed by someone or a group independent from the business unit being reviewed and by someone or a group competent at doing walkthroughs and transactional testing and preparing written deficiency reports.  Typically an internal audit group that has done internal controls or Sarbanes-Oxley walkthroughs would have the skills to perform such risk management walkthroughs and to write-up deficiencies.  Those deficiency write-ups should be reported to the Board – and that step alone really gets everyone’s attention and gets them on the compliance bandwagon.
If the current economic environment has taught us any lessons, one should be that risk management is not a luxury to be practiced only by high-minded Best-In-Class companies.  It also appears likely that risk management standards may soon become a government-mandated set of regulations codified similar to Sarbanes-Oxley – only broader in scope beyond just financial reporting risk.
© 2016. The Fast Track Group, LLC. All Rights Reserved.

 


[i]Dvorak, Phred and Scannell, Kara. “Investors, Take Note:  New Bill to Target Boards, ‘Say on Pay'”.  The Wall Street Journal. 25 April 2009.

last edited on May 13th, 2009 at 4:22 PM