Job Shop Financial Turnaround Process

Turnaround Process Outline

Develop company specific turnaround plan
Gain full commitment of the ownership for the turnaround effort
Stabilize cash flow
Unleash the capabilities of the employee group
Build strong processes and controls to manage day-to-day operations
Generate additional revenue
Secure trust and cooperation with the supplier base
Solidify the banking relationship
Establish post turnaround growth strategy

Executive Summary

This robust turnaround process is built on a base of tight management of existing cash flow supplemented by common sense techniques that provide dramatic improvements in operations. These operational improvements are then leveraged to increase sales to current customers, increase pricing power and expand the customer base.

The three primary tools used are the “Cash Management System¹”, a comprehensive Excel template that quickly allows the company to make the best tactical use of available cash. This system facilitates the difficult process of deciding on a vendor payment schedule when cash is very tight. It also includes a 13-Week Cash Flow model for planning cash flow and reporting to the bank.

The second tool is the “Management Dynamics²” gain sharing plan. This bottom line based incentive bonus motivates employees to think like owners. It induces employees to embrace rather than resist the fast-paced changes required in a turnaround. This gain sharing plan also includes a strong expenditure control component designed to direct spending to where it will bring the greatest return.

The third tool is the “Red Zone Scheduling System³”. This job shop scheduling, production management and process improvement system drives WIP and lead time reduction. WIP reduction provides an immediate cash boost. Lead time reduction facilitates on-time shipments, helps build pricing power and can lead quickly to new customer opportunities.

The gain sharing bonus pool and fees for the turnaround and scheduling experts are generated by the resulting operational improvements as they are translated into reduced inventory, reduced manufacturing and S, G & A costs and additional production capacity.

The turnaround is complete when the “Cash Management System” is no longer needed because all vendors and other creditors are being paid within terms by internally generated cash. The other indicator that the turnaround is complete is that the process of ongoing improvement and the growth strategy kicked off by the “Management Dynamics” gain sharing plan and the “Red Zone Scheduling System” can be continued indefinitely by the company without outside assistance.

Develop company specific turnaround plan.

Review all aspects of cost, quality, delivery, pricing, scheduling, engineering, marketing, sales and strategy with the ownership and management.
Determine the state of the repetitive and new business sales efforts.
Interview a cross-section of the employee group.
Develop a rough sense of production capacities and utilization levels.
Study the internal and external financial reports.
Establish the critical success factors for the turnaround.
Develop a list of obstacles to a successful turnaround for the company.
Determine how to overcome each obstacle with an intermediate objective.
Compile the critical success factors and intermediate objectives into a turnaround project map.
Refine the turnaround map with ownership and management.

Gain full commitment of the ownership for the turnaround effort.

Assume that there will be no additional owner capital available. Base the turnaround plan on the need to generate all cash internally.
Obtain owner agreement for the “Management Dynamics” employee gain sharing plan. See section below on motivating the employee group.
Demonstrate that the gain sharing plan will be self-funded by profit improvement.
Turnaround expert compensation is self-funded as well.
Share of gain sharing bonus pool for a determined period.
Modest weekly stipend structured as a draw on the gain sharing bonus pool.
Fees to a third party for coaching on the “Project Velocity System⁴”. The cash for these fees is usually generated out of the initial WIP reduction from this effort.
Obtain owner agreement for the “Red Zone Scheduling System”.
Can be implemented quickly.
Drains WIP from the production system, freeing up cash and concentrating inventory where it will do the most good.
Focus is on 100% on-time delivery and production lead time reduction.
Does not require expensive software or extensive data collection efforts.
Turnaround and scheduling experts are independent from the company’s bank.
The company does not require much upfront cash to get started with the turnaround effort and most aspects of the plan can be initiated very quickly.
Do not proceed without owner understanding and approval of the “Management Dynamics” gain-sharing plan and the “Red Zone Scheduling System”.
Craft and sign turnaround engagement agreement letter and kick-off the turnaround.

Stabilize cash flow.

Plan every dollar spent tactically.
Implement the “Cash Management System” Excel template.
13-Week Cash Flow (TWCF) model development. This is the most important turnaround planning communications tool.
Beginning checking account balance for the week.
Cash receipts projection from the cash collection waterfall (see below).
Cash disbursements schedule from the A/P waterfall (see below).
Short time horizon A/P items.
Payroll related items
Principal and interest payments.
Other non-A/P payments.
Draws and payments on the line of credit.
Ending checking account balance projection.
Cash collection projection.
Update with shipments daily.
Project timing of cash receipts based on collection history.
Reconcile the cash collection waterfall total to the accounts receivable balance daily.
Accounts payable projection.
Start with the vendor invoice listing.
Develop temporary payment terms for all vendors (greater than vendor specified terms).
Calculate a payment prioritization index for each invoice.
Produce the A/P payment schedule.
Refine the payment schedule to use available cash and borrowing while avoiding overdrafts.
Adjust temporary payment terms based on supplier cutoffs and complaints and progress with general cash availability.
Line of credit borrowing base roll forward.
Tie all the above inputs together in the 13-Week Cash Flow (TWCF) model and update all tabs and the TWCF model weekly.
Put all A/P and other payments in the “Cash Management System”. Prioritize each scheduled payment based on tactical need and vendor agreements or vendor tolerance level. See section on establishing trust and a cooperative relationship with vendors.
Minimize finance charges, penalties and other extra costs normally associated with tight cash operations using the “Cash Management System”.
Emergency CapEx expenditures only in the early stages of the turnaround.
Use the “Red Zone Scheduling System” to dramatically reduce WIP to free up cash.
Step up A/R collection efforts in conjunction with operational improvements.
Prioritize engineering time using the “Project Velocity System” to maximize short term cash flow.
The “Cash Management System” can be discontinued when all vendor and other creditors are being paid within terms from internally generated cash.

Unleash the capabilities of the employee group.

Provide a strong incentive for employees to stay.
Replace current incentive compensation programs with the “Management Dynamics” gain-sharing plan.
This is an exceptional bonus paid for exceptional performance.
Everyone in the employee group is covered by the plan.
This is the only incentive compensation plan.
Calculate the performance profit (loss) for each of the prior 12 months.
50% of the increase in the performance profit from the same period in the prior year is added to the bonus pool each month.
1/12^th of the bonus pool is paid out each month. This is designed to cushion the bonus plan from the normal seasonality of the business and to reduce the amount of cash needed to pay the bonus in the early months. As the plan gets established, this also gives employees some predictability as to the magnitude of the bonus in the next few months.
Employee percentage is based on their share of total gross pay for the past 12 months. Differences in performance and capabilities among employees are built into the base pay.
If performance profit in a period is less than performance profit in the same period in the prior year, the bonus pool could end up with a negative balance. If this happens, there is no recoupment of bonuses already paid to employees, but no further bonuses will be paid until the bonus pool goes back into positive territory again.
Still need to monitor base pay levels and make adjustments to market and for performance as necessary. Base pay is intended to be at the market level without the promise of a bonus under this plan.
Share financial results with the workforce regularly to show the progress of the gain sharing bonus pool. Include the percentage of gross pay to be paid out.
Start paying out 1/12^th of the gain sharing bonus pool in the month following its establishment so employees begin to be rewarded for their efforts. Initial payments will be very small but will grow as the bonus pool grows in step with improvement.
Train the workforce to maximize performance profit and thus the gain sharing bonus.
Set up an internal team to help manage the budget and expenditure control aspects of the gain sharing plan. Resources begin to naturally flow to where they can provide the most improvement.
Employees will cooperate with the other aspects of the turnaround plan if it can be demonstrated that they will build the bonus pool.
Owners and employees’ goals are now congruent. Employees are thinking like owners. They will now better appreciate the gravity of the financial situation and act accordingly because they have a significant stake in the outcome. Employees now have a strong incentive to reveal currently hidden capacity that can be used in lead time reduction and marketing efforts.
Management talent is usually spread thin in a turnaround situation. This gain sharing plan increases the effectiveness of the available management by giving all direct reports a strong incentive to follow management directives as long as they can see that they will lead to improvement and a larger bonus pool.
If improvement stalls, no further bonus is earned. This provides a strong incentive to everyone to keep the turnaround and the improvement process on track.
This gain sharing plan greatly speeds up the turnaround process and it significantly reduces the level of distracting personnel issues and conflicts that can crop up when such quick changes are attempted. Employees trust each other more. Silos are broken down. The turnaround effort is quickly scaled up to encompass the entire company.

Build strong processes and controls to manage day-to-day operations.

Implement the “Red Zone Scheduling System” to manage scheduling and manufacturing operations. Pull orders through the plant using ship dates. Key off capacity at the most heavily loaded work center to launch orders at the gateway work centers.
Reduce fire-fighting by concentrating inventory only at the most strategic points in the production process such as at the most heavily loaded work center, assembly and the shipping dock. Drain all other WIP from the production system.
Review the buffer reports from the “Red Zone Scheduling System” daily to focus expediting efforts to meet all ship dates.
Implement the “Daily Flash Report” to review status of key financial indicators such as cash, shipments, backlog, receivables, payables, inventory, on-time shipment performance and bank borrowing base. Take actions as necessary based on this report.
Implement the “Management Dynamics” budgeting and expenditure control system.
Use buffer management reports from the “Red Zone Scheduling System” to focus production lead time reduction efforts.

Generate additional revenue.

Collect marketing and sales metrics: backlog, sales cycle length, win ratio, raw material cost percentages.
Review product pricing and history of pricing changes. Bring pricing into line with the market where possible.
Define the sales funnels for the company to begin to coordinate repetitive and new sales with available capacity.
Use the “Project Velocity System” to prioritize and greatly speed up new product development and other engineering activities.
Develop a guidance report to track new business development probability and timing.
Determine market segments currently served and all market segments potentially available to be served given current equipment and personnel.
Implement the “Red Zone Scheduling System” to focus scrupulously on meeting customer due dates in order to retain current customers.
Use the “Red Zone Scheduling System” to dramatically reduce production lead time to open up the market.
Use capabilities and capacity gained from the “Management Dynamics” gain sharing plan and the “Red Zone Scheduling System” to develop compelling marketing offers to bring in additional business quickly.

Secure trust and cooperation with the supplier base.

Share financial information with creditors as needed to demonstrate to them that they will be paid eventually. Gain agreement from suppliers that materials will continue to flow as they are being brought back into terms.
Share A/P payment schedules with creditors as needed.
Share financial information and projections with suppliers as needed.
Communicate early with suppliers if the A/P payment schedule cannot be met as planned.
After cash flow stabilizes, start bringing all suppliers back into terms. Eventually begin taking offered discounts starting with the most generous.

Solidify the banking relationship.

Share the turnaround plan with the bank. Incorporate feedback from the bank on the goals and timetable of the turnaround.
Develop a financial projection through the end of the next fiscal year to share with the bank and other creditors. If out of covenant compliance, show the bank how the company will come back into compliance with loan covenants as the turnaround proceeds.
Bank principal and interest payments are likely taken from the checking account automatically, so prioritize these payments in the “Cash Management System”.
Assume there will be no additional bank capital available in the turnaround plan.
Quickly true up the balance sheet as much as possible by reviewing bad debts, valuation of prepaid expenses and inventory, ensuring that all A/P is recorded and checking the sufficiency of accruals.
Develop a schedule to meet with the bank to review progress of the turnaround. Provide the updated 13-Week Cash Flow model to the bank weekly.
Develop a closing schedule that allows reporting to the bank one week after the end of the month.

Establish post turnaround growth strategy.

Identify market segments to target to complement current segments served.
Review competition within the industry, buyers, suppliers, potential new entrants and substitutes.
Review for any potential disruptive technologies affecting the market.
Establish a plan for sustained growth building on the capabilities developed and improved during the turnaround process.

Summary

This highly dynamic turnaround process combines the normal aspects of a traditional cash flow focused turnaround with a strong emphasis on improving operations. The gain sharing plan and resulting rapid operational improvements reveal currently hidden capacity which allows greater sales to existing customers and the opening up of new markets. This process continues to provide benefits long after the turnaround effort is complete because it sets in motion a powerful and durable process of ongoing improvement and growth.

Notes

²John and Pamela Caspari, Management Dynamics (Hoboken: John Wiley & Sons, Inc., 2004), 64-93.

⁴Dr. Lisa Lang’s “Project Velocity System” (http://www.projectvelocitysystem.com/).