By: Tommy Onich CTP
A small business that is facing difficulties faces an unforgiving, ambiguous, and exigent environment. There are two crucial characteristics of this environment time is of the essence and management information systems are likely dysfunctional, and time available is dependent upon cash resources.
These resources are likely limited by poor financial performance and both survival and recovery are limited by a lack of data. The data available is often inadequate, erroneous, inaccurate, or even fraudulent.
This situation is compounded by pervasive and entrenched denial. The result is a lack of critical thinking and reluctance of anyone to be the harbinger of bad news.
Strategy and Tactics
The terms strategy and tactics are used ubiquitously. Unfortunately, they are also used as synonyms.The word strategy is a war term derived from the Greek “Strategia”. This is the art of the troop leader, office of the general or command. This meaning evolved into the notion of a high-level plan necessary to achieve one or more goals.
Thus, strategy was understood to govern the battle. It was a plan of action or policy designed to achieve a major overall aim. Tactics refer to the means by which a strategy is carried out and planned, they are fluid amorphous, and ad hoc.
In the context of distressed organization, these two terms describe a process and methodology well suited to the situation. Strategy provides a guiding light in the midst of chaos, confusion and exigency. The skillful use of tactics will optimize outcome.
Models and Strategy
A business model describes the rationale of how an organization creates, delivers, and captures value in economic, social, and other contexts. The construction of a business model is an inherent part of business strategy.
For a company facing challenges, strategy will likely center around monetary value. Skillful execution will ensure that good decisions are made. The adroit strategist will achieve an outcome that is somewhat better than expected.
The strategic choice may be what we think of as recovery, resurrection, or turnaround. Or it may be liquidation or disposition.
Given the vast scope of available conceptual models, there are many types that can be used in strategic development and its execution. We will look at financial models that yield a variety of information of vast importance to the business model.
1. Ensure survival to permit assessment and strategic choice.
2. Provide an analytical framework allowing a strategic decision to be made.
3. Provide a foundation for tactical choices.
4. Provide a platform for the immediate use of tactics that will enhance any strategic choice.
Cash is king.
It allows operations to continue while it addresses any problems. It is also used to manage rapidly appearing risks that appear in multivariate form. Cash is necessary to execute strategy. It is always scarce and obtaining more is problematic.
Necessity and scarcity jointly determine the goal of cash models, this is to control, conserve and find new sources. These models are the daily cash report and a weekly cash report.
These reports must be clear, accurate and easy to understand. Unnecessary complexity is fertile ground for but not beyond the point of accuracy error, confusion, and obfuscation. The weekly report should ideally extend for a few months, but not beyond the point of accuracy. Together they state available cash, show changes to cash drivers, mesh with other accounting tools such as A/R,A/P.
An Analytical Framework
An analytical framework will address the fundamental choice of strategic choice and its execution. This will be to attempt a turnaround or liquidate.
The parameters for a successful turnaround are; sufficient capital, a profitable core product, and management talent.
Using these parameters as a framework will provide a method for assessment and concurrently allow tactics that will optimize outcome regardless of strategic choice.
This may include such things as opportunistically improving revenue, enhancing asset value, locating hidden assets, etc. During the process, data will be checked and refined, to ensure accuracy. Also the quality of management will be revealed.
The financial models used will involve a newly constructed, and accurate balance sheet, and a prediction of future revenue and expense The completion of the new balance sheet and projected income and expense will reveal if a profitable core exists, the potential for financing and the quality of management.
Estimating future profit and expense is more problematic than reconstructing a balance sheet. The completion of the new balance sheet and projected income and expense will reveal if a profitable core exists, the potential for financing and the quality of management.
During the process the data is refined, and information comes to light, tactics are taken to reduce costs. These actions are a benefit for any strategic choice.