Ready for the Worst

If your company hits a wall, do you have what it takes to make the best of a bad situation?
Tim BurkeFebruary 2, 2009

When Robert McDonald was named CFO of Woolworths last October, he sounded like a man on a mission — and with good reason. The troubled UK retailer lost nearly £100m (€111m) in the six months to August 2008, and McDonald joined an army of new executives — including a new CEO — to turn it around. “There is space on the High Street for a successful home-based variety store,” he told investors reassuringly.

But he was wrong. As its cash crisis worsened, Woolworths entered administration in late November, hoping to find a buyer. In early January, with none in sight, its last shops were shut down.

More CFOs will find themselves running the finance function of an insolvent business as the downturn continues to take its toll. Euler Hermes, a credit insurance company, predicts the number of insolvencies worldwide will rise by 25% this year following a similar increase in 2008. In western Europe, the UK could be particularly hard hit — the firm predicts a 34% rise this year following a 25% increase in 2008. In France and Germany, it forecasts a rise in insolvencies of around 12%. The Netherlands could see a surge of 38%. In eastern Europe the firm predicts rises of 20% in Hungary and 15% in the Czech Republic. (See “More to Come” at the end of this article.)

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Though a daunting prospect for most CFOs, a burgeoning corporate rescue culture means that there is greater scope for effecting a turnaround than in the past. Countries across Europe have introduced schemes similar to Chapter 11 bankruptcy protection in the US, aiming to give a company breathing space from creditors and a chance to recover, rather than just being wound up. Incumbent management teams can prove a pivotal part of the process.

The UK’s administration process — overhauled in 2002 — is a case in point. Initiated by either a company or its bank, a professional takes control of an insolvent company, aiming to rescue it or at least squeeze out more value for creditors than liquidation could achieve. A string of distressed retailers in the UK used the process in the aftermath of Woolworths’ collapse. But regardless of where a company is based, the basic skills needed from CFOs during administration are the same everywhere.

So what does it take for finance chiefs to hold it together even as their companies are falling apart? Insolvency practitioners and restructuring experts cite three skills when describing their ideal CFO — a perfect grasp of up-to-date figures, the ability to plan for every eventuality and a strong enough voice to ensure that when you speak, your board listens. These skills shouldn’t be alien to an experienced finance chief, and yet insolvency experts bemoan a lack of them in the cases they’re seeing today. If a CFO can manage to demonstrate these key skills during troubled times, there may still be a job awaiting them at companies that survive.

Tick These Boxes

It would seem to be a given that a CFO in any situation should have a thorough grasp of the company’s finances. But insolvency experts certainly don’t take this for granted, particularly if there’s been a high turnover in the executive team. And as a company’s performance deteriorates, the challenge for new CFOs and FDs to stay on top of the numbers is all the harder. Chris Laverty, a partner in the corporate recovery team at KPMG, says, “In an administration, my first thought is, ‘Oh no, the FD has only been here two months.’”

Another key area of focus is for reporting practices to provide the right information at the right time. Even healthy companies grapple with this challenge, but it’s even worse for unhealthy businesses — and could be one of the reasons why they’re in such trouble, says Neil Griffiths, a partner in the restructuring team at law firm Denton Wilde Sapte. “If you’re in distress you want daily [rather than monthly or quarterly] information coming through so you can see how close to the edge you are. The CFO becomes absolutely critical in all of that.”

At a minimum, up-to-date numbers give CFOs a better chance of mapping out a contingency plan, insolvency practitioners point out. In the current climate, “if FDs come into a company that they know is in a distressed state, they should start thinking of a contingency plan asap,” Laverty says. It’s a plan-for-the-worst approach that administrators say makes the difference between a good CFO and an excellent one in such situations. 

A finance chief who can confidently and quickly provide full visibility on deteriorating cash positions, identify where the company is being squeezed and articulate what to do about it is more impressive to an administrator than one whose leadership flourishes in good times, but withers in bad times.

This is when a CFO’s authority is tested. “The key thing for CFOs is that they have a strong enough voice in the boardroom,” says Alan Hudson, a partner at Ernst & Young, who recently acted as administrator for UK music retailer Zavvi. “They can often get shouted down.”

His advice is to stick to the facts, however painful they might be for members of the board to hear, and the sooner they are made known, the better. “It’s no good after the event saying, ‘I always knew we were destined to fail,’” Hudson says.

You’re Being Part of the Solution

If CFOs have gained the respect of colleagues and stakeholders by proving their mettle during a downturn, they’re more likely to be seen as an indispensable member of the management team when the administrator takes control. This is something KPMG’s Laverty observed when she was part of a gruelling three-year administration process in 2004 at Courts, a UK furniture retailer which was forced to sell 20 businesses around the world. After the process, finance director Stuart Miller was named CEO, and the company’s financial controller was promoted to his old job.

What of the CFOs who lack the essential skills? The reality is that there can be little reason for an administrator to keep him on the team once a formal process has started. Hudson says that he recently found himself relying on the financial controller more than he did the CFO to get a company through administration. “The finance controller knew all of the customers and systems and could help us put together a trading forecast,” he recalls. “The CFO was so removed from the detail,” that Hudson let him go just days into the process. “It’s unfortunate, but sometimes this is a decision that has to be made,” he says.

It is clear that CFOs can’t take anything for granted during administration — even their own jobs. “If a business is going broke, cash management is critical,” says David Lacey, a partner at law firm Stephenson Harwood. “In insolvency, every director is a CFO.” The real CFO just needs to make sure he’s the best one there.

Tim Burke is senior editor at CFO Europe.