Monday, August 15, 2011

The US debt ... now imagine it was a business Turnaround.

There have been countless articles written about the current state of the US debt.... so here's another one. Except I thought I would put my "business hat" on and look at it from a Turnaround perspective. 

Before I go on, please note:
  1. I have absolutely no interest in taking a political stance. I am merely putting a business lens on the situation.
  2. I am obviously simplifying the scenario and solution, considerably, for the purposes of the article.

So let’s set up the scenario.

We have a company that is over geared (too much debt) and making a loss (deficit) as its expenses are significantly greater than its revenue. Unable to continue its current operations through its existing cashflow, the company has recently gone to the bank in order to increase its Line Of Credit (debt ceiling). However this was seen as not solving the company’s problems and hence the bank is reluctant to agree to the company’s request. Given the current state of the business it is unsurprising that the bank would like to increase the interest rates of its lending to the company as it believes the current situation is riskier than the past (AAA to AA+ rating downgrade).

Assignment:  The bank has asked for a review of the situation in order to bring the company back to profitability as quick as possible and ensure the existing debt is paid down.

So here we have a typical case of a company in distress and the requirement is to implement a Turnaround program. 

Question 1: Can we increase revenue? When undertaking a Turnaround assignment one of the first questions that needs to be asked is “Can we increase prices and not lose volume?”. Whilst price elasticity is always a consideration it never ceases to amaze me how  companies do not increase prices for fear of losing business however when they are forced to raise prices due to their financial distress they are able to get the price increases through and remain at similar volumes. This will not be the case for all businesses but the rule applies – in a Turnaround if you can increase prices whilst maintaining similar volumes (i.e. increase revenue), THEN DO IT!

Question 2: Can we reduce costs? From a P&L perspective, reducing costs is relatively easy when you are only looking at lines on a spreadsheet. However the reality is cost reductions usually involve impacts to people i.e. not merely numbers on a spreadsheet and hence the decision making process often becomes emotive and clouded. Additionally sacred cows tend to rear their expensive heads during cost reduction programs. However the reality is that when a business is in a turnaround phase ALL costs need to be reduced. It’s not easy and it hurts emotionally but when the business is at stake it is better to make the cuts than end up in a situation where bankruptcy is declared. So a similar rule (see Question 1) applies – in a Turnaround if you can reduce costs whilst ensuring the business operations continue, THEN DO IT!

To summarise: If the US was a business any CEO recruited to Turnaround the financials would try to increase revenue and reduce costs.... both at the same time. Sacred cows would be thrown out the door and the clear objective of bringing the company back to profitability would be ingrained in the change management program across all levels of the organisation. The increase in the Line Of Credit would not be required as the company would be able to manage itself in its given cashflows. Finally, as the debt is paid back, the interest rate that the bank lends at is reduced as the risk associated with the company is reduced.

Again I appreciate the fact that I have over simplified the situation and like so many out others out there I sure I may be deemed as just an armchair expert but to quote George Burns, “Too bad that all the people who really know how to run the country are busy driving taxi cabs and cutting hair.

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