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Being able to predict when cash flow problems will arise is one thing. Correcting them is an entirely different matter.

The leadership of any organization needs to know where it stands. It needs to be sure of what it is aiming to achieve and it needs to be able to monitor its progress towards that goal.

These needs are especially pronounced in any organization on the brink of failure.

A wide range of factors must be considered in this regard. The management will therefore need to carry out a thorough review of existing operations to analyze long-term viability of each and to construct an overall plan for the restoration of the health of the organization.

It also needs to communicate that plan down to all levels of the organization and to the network of customers, suppliers and creditors who deal with the organization.

The goal of this process is to understand the origin of the problems that must be solved, to bring forward a realistic action plan for overcoming those problems.

This plan must not only identify what is wrong, but also how problems will be made right.

It must cover who is responsible for each step in the recovery, how success will be measured and set significant milestones in the corrective process, so that process can be assessed. Critical questions include:

• What parts of the business are profitable at present?
• Which lines of business are losing money and which are the worst offenders in this regard? Can these money-losers be shut-down on even a temporary basis? If so, at what cost?
• The suitability of the organization’s capital structure to the organization’s operations, including whether the debt service demands on the organization are realistic, and if not how they may be adjusted.
• What parts of the business have potential for profitable operations?
• What are the costs associated with discontinuing unprofitable lines of business?
• Will there be financing available during the turnaround period to cover costs? Who will provide it? What is the correct relationship with this creditor (if applicable).
• How will that financing be repaid and when?
• Can the organization provide a realistic plan to the creditor to demonstrate that it will be repaid and give a clear indication as to when?
• Does the organization have adequate organizational resources to revive?
• Which line managers are effective?
• Who could replace ineffective managers?

It is also necessary to conduct a critical review of the abilities of the organization’s senior management, perhaps as part of a broader organizational review.

This review must incorporate consideration of the industry in which the organization operates, the organization’s position in the industry, the organization’s cost structure and its capital structure.

At a minimum, any review of organizational operations should incorporate consideration of both production and sales (and the relationship between the two).

Important questions in these areas include: How fast does inventory turn-over in general, and are there any anomalies among the individual product lines? What is the mix of finished goods, work in process and raw material, and how does this mix compare to original forecasts?

The goal of this review is to reduce the proportion of working capital tied up in illiquid inventory.

If inventory is likely to spoil or go stale, consideration should be given to its sale, although in such a case, affected creditors should be consulted first to address any concerns that they may have with respect to such a program of disposal.

Nevertheless, it is essential the organization review not be limited solely to production and sales. It is perhaps far more important to understand an organization’s cost structure because cost reduction efforts usually produce more immediate and lasting results than trying to increase sales or liquidate assets.

Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.