Address cash money record

When disaster strikes, sales, earnings, and most everything else must take a backseat to cash flow. Troubled companies that move early and decisively to manage for cash may slip the hangman's noose.

After a decade in the high-tech spotlight, Wang Laboratories had lost its luster. Revenues were shrinking, and the company was buried $520 million in debt. Moving quickly to generate cash, with the help of a consulting firm, Wang sold its non-strategic assets, closed high-cost facilities, and consolidated its operations. The effort wasn't enough to avert a bout with Chapter 11, but a slimmer, more focused Wang emerged from bankruptcy protection as a key player in imaging software.

The Wang scenario repeats itself several thousand times each year: Sales fall, working capital is neglected, fixed costs and capacity remain high. Results fall short of projections, lenders and the credit markets become impatient, and the upshot is a downward spiral of tight credit, ratings downgrades, and - for the most troubled companies - bankruptcy. Between 1990 and 1993, more than 86,500 companies filed for protection under Chapter 11, some 20 of them with more than $5 billion in assets. Increased revenues would not have guaranteed their survival, but astute cash management might have.

Cash-conscious companies rely on strategies that aren't always emphasized in business schools, such as focusing on receipts and disbursements, reducing fixed overhead and other costs, practicing diplomacy with banks and other creditors, and cutting the dividend. Through painful experience, Wang, Unisys, IBM, and a host of other companies learned to manage for cash flow. CEOs of other, healthy companies, such as Warnaco's Linda Wachner, also find cash focus an effective way to generate superior shareholder value.

BUYING TIME

Richard Miller already had earned his spurs in the Penn-Central reorganization and the GE/RCA consolidation when he became Lowell, MA-based Wang's new president and chief executive in 1989. He recognized Wang's symptoms as soon as he walked in the door: The sales force was bucking heavy odds in an attempt to increase sagging market share. Finance and administration were focusing on cost controls and productivity, trying to improve earnings per share and placate nervous stockholders. Research and development was burning the midnight oil, investing heavily to make Wang's technology competitive in the rapidly changing world of computers.

Most important, the company was running out of cash - fast. Wang's chief financial officer and general counsel were nearly alone in recognizing the severity of the situation, until Miller arrived. All three saw it as the root of many of the company's other problems and realized that immediate action was needed if the ship were to stay afloat much longer.

It was time to put earnings and product development on the back burner and shore up the balance sheet. That would buy time to rejuvenate operations - or to prepare the company for a reorganization, if necessary.

Demanding immediate attention was the $520 million bank debt, much of which the company had used to fund operations as revenues lagged expenses. This debt had to be eliminated if Wang were to survive, but even more pressing was the threefold problem presented by impending default.

First, Wang had violated its debt covenants and needed the banks to agree not to declare a default. Second, Wang needed to fund additional losses that were expected before any turnaround plan could be implemented. That meant the company had to convince the banks to permit another creditor, one that would have claim rights superior to theirs, to lend it more money. Third, the banks had to be persuaded to rewrite the covenants, because the planned turnaround effort would create new writedowns in violation of the old covenants.

The banks' consent was won with a plan that convinced them - and the new creditor - that the debt would be repaid, and they would all get their money. Finally, Wang's turnaround could begin.

The first few whacks were easy. Nonstrategic businesses and assets were identified for sale. High-cost manufacturing facilities were closed, their work outsourced to lower-cost producers. Plants were consolidated. The company's private golf course was snapped up by developers, as was the company-owned hotel. A bargain-hunter bought the Gulfstream IV corporate jet. Profits were not a consideration in this fire sale. The bleeding had to be stopped. Cash - any meaningful amount - had to be generated.

This method of "managing for cash" extended Wang's life for three years and raised enough money for the company to work off its huge bank debt plus all but $37 million of the new debt it took on to finance the turnaround. Wang was left with a very liquid balance sheet.

Nevertheless, technology was changing so rapidly that Wang could not stem the slide in revenues as customer preferences shifted from minicomputers to personal computers. Its stronger balance sheet, however, facilitated the company's route through a Chapter 11 reorganization and its subsequent re-emergence as a more focused, significantly smaller, software-oriented company.

Two years after emerging from bankruptcy protection, Wang is healthy and shows promise. The company recently signed an agreement to incorporate its imaging software into future versions of Microsoft's Windows 95 and Windows NT operating systems. This gives Wang a major competitive advantage.

LESSONS NOT TAUGHT

As turnaround and restructuring specialists, we most often are faced with an eroding business whose costs are too high. The challenge is to find the viable core business and make it as productive as possible, strip away non-core operations and assets, and cut costs so the core business can realistically support them.

Our present assignment at National Car Rental System is a rare exception. Here, the emphasis has been on increasing revenues by improving customer service, increasing efficiency of fleet management, strengthening the car reservation system, and offering higher-quality cars. Cash is not unimportant, of course, but our effort has focused on seizing the opportunity to improve efficiency and grow revenues.

Nevertheless, for the majority of companies in financial distress, salvation through increased revenues is a false hope, and the CEO should concentrate instead on maximizing cash. Deft cash management can avoid or alleviate the pain of bankruptcy and, in many cases, even resuscitate companies on the brink of corporate death.

Unfortunately, except for conceptual discussion of "cash flow," cash is not meaningfully treated in most business school curricula. Instead, the focus is on sales and earnings per share.

The importance of cash also has been shortchanged in the real world, and it may take a cultural shock for traditional managers to recognize its value as a business tool. But they must. The intensity of recent economic and technological change has brought home a long-forgotten truism: You can't feed today's hunger with tomorrow's crop. EPS, stock price appreciation, market share growth, and leverage are important, but "cash is king."

You don't have to convince Unisys CEO James A. Unruh of that. Created in 1986 by the merger of Burroughs and Sperry Rand, Blue Bell, PA-based Unisys was caught up in the same computer industry transition as Wang during the early 1990s. Unruh saw beyond product and marketing to the real crisis. After analyzing the balance sheet, he realized the company would be out of business in six months unless it generated the cash to support its daily operations.

Unruh swiftly implemented a global restructuring that generated more than $1 billion for the $10 billion corporation. The job required 13 turnaround teams of employees mandated to increase liquidity and improve operating results in specific areas of the company. Unisys worked its accounts receivable so well that they dropped to less than 55 days; the computer industry average is about 70 days.

NO TIME FOR A VISION

An effective cash management system is based on a highly accurate plan of actual receipts and disbursements, which is quite different from accrual accounting. Troubled companies must aggressively manage cash to create a cushion that will keep their doors open and provide a negotiating base with the banks to extend credit. Cash also provides the time needed to address the business issues underlying their problems.

"The last thing IBM needs fight now is a vision," CEO Louis V. Gerstner Jr. said shortly after taking the reins of the once invulnerable, but suddenly troubled, Big Blue. A corporate vision is fine, but even more basic to business survival is having cash flow in faster than it flows out. When Gerstner arrived at Armonk, NY-based IBM, that wasn't the case.