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.