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How CFOs should tackle a restructuring: in a restructuring situation, the CFO plays a pivotal role in meeting stakeholder expectations. A turnaround specialist outlines some of the areas that should be considered before you find yourself in the middle of a crisis.

CFOs of public or private companies are more responsible, and ever more at risk, with respect to the expectations of a company's stakeholders, whether equity or debt. If expectations are not met, the company may face an amendment in credit facilities, a refinance, a "troubled debt restructuring" or even a sale event under distressed circumstances.

A good time to consider what you might do to ensure that if a challenge arises, you will not only survive but capitalize on the opportunity it might present is before you are smack in the middle of that situation. And, in light of the recent turmoil in the financial markets, here are some considerations and lessons learned from past restructurings.

Failed Expectations. Stakeholders expect the CEO and the CFO to "own" the budget plan. When expectations aren't met, shareholders and lenders may question the CFO's skills in educating management or in challenging assumptions during the budget cycle. In this area, CEOs rely on CFOs, who may face a challenge in doing this without appearing critical. At all costs, the CFO must maintain his or her political effectiveness with management.

Consider establishing reporting tools that support self-discovery for key operating areas. Management will become regularly grounded in its thinking. Weekly dashboards, key performance indicators (KPIs), industry benchmarks and rolling forecasts allow management to come back to earth without feeling the CFO is not supportive of their goals. With support of information technology (IT) specialists, these tools need not be an accounting department product.

Budget Processes: Start Early. Most companies that miss projections have a simple thing in common: the budget process is hurried. The budget process must begin early enough to support and seize available opportunities in all areas. New disciplines and initiatives have lead times that exceed one year. Consequently, budgets should have event horizons that mirror these periods.

Get the Numbers Right. The frequency of accounting restatements is alarming, and it's not just arcane issues driving the problem. Frequently, errors are made in revenue recognition, work-in-process and inventory valuation, self-insurance reserves, sales expense recognition and capitalization of intangibles. Use risk-based auditing techniques to evaluate which areas are not well understood by personnel or where facts and circumstances may drive surprises.

Train and Delegate. Every accounting environment relies on strong systems and procedures. Ask yourself whether you are investing in your people. Are you building your bench and grooming staff? Do you support your staff with continuing professional education (CPE) and convenient online services? Do you keep your own credentials and training current? And certainly, if you don't already have one, you will need to develop a written accounting procedures manual.

Projections. The financial analysis group should support a rolling forecast that maintains a horizon of from 18 to 72 months. This is updated with each period. The forecast is not a slave to the budget but instead reflects current actual trends in operations, renewals of leases, insurance facilities and customer and supplier relationships. The rolling forecast includes updated forecasts of collateral, credit facilities and covenant ratios. It should be supported by a management discussion.

If liquidity is a problem, you should consider developing a 13-week cash flow forecast, which is a standard request from bank workout departments.

The Zone of Insolvency. A company may be considered insolvent if its liabilities exceed its assets or if it is unable to meet obligations as they came due. When a company is in the "zone of insolvency," fiduciary obligations of the company, board and officers expand and include duties to credit-holders as well as to shareholders. Legal counsel should be consulted for an appreciation of the implications of this state.

In such a situation, the CFO should be familiar with these terms and the increased fiduciary obligations they imply:

* Liquidity is paramount to remaining outside of the zone. If the CFO can ensure the company remains out of the zone of insolvency, he or she will be prized by the stakeholders for these efforts. There are many ways of remaining liquid. Working capital opportunities are important and may include negotiating terms with customers and vendors. Tax opportunities often exist. For example, net operating losses can be carried back to prior years. Tax refunds and overpaid estimates can often be accelerated.

* The anticipation of credit risk by using credit insurance is an inexpensive and surprisingly overlooked opportunity. Additionally, asset-based lenders will often grant higher advance rates to insured receivables, which helps liquidity.

Also, it's wise to consult with fellow financial professionals or turnaround professionals with respect to your business or industry to uncover areas of opportunity you may have overlooked.

Restructuring. Should the forecast change significantly, a restructuring may be inevitable. A restructuring is a right-sizing of the capital structure to the new expectations. Debt and equity participants must evaluate how and whether to remain in the capital structure.

Equity investors may be diluted (if "out of the money") or may have to defend their position with additional investment. Senior investors may sell their loans or negotiate new covenants with the borrower. Restructurings do not necessarily involve a bankruptcy proceeding and are more often negotiated between the parties. However, bankruptcy may be considered where there are parties with whom agreement cannot be reached.

The rolling forecast aids the CFO immeasurably in supporting these negotiations. The CFO, along with management, can develop a capital structure that is right-sized to the new realities of the business. Management contributes to constructive discussions with the stakeholders, gains their confidence and trust and stays in the game. The CFO will be central to these efforts for having implemented these disciplines early.

While other advisors will be involved, the starting point will be the company's perspective on what is realistic and doable, and the CFO's credibility will be tested. The CFO is an active player in these negotiations and, one hopes, a successful survivor.

Every CFO should consider these disciplines. Lenders and investors tend to remember the comrade-in-arms who got them through a challenging investment and saw them through to the other side. Moreover, relationships are often instrumental in introducing CFOs to new opportunities in their careers.

ROBERT TORMEY, ( CPA, is a Shareholder of Tatum LLC who is based in Los Angeles. He's been involved in many turnaround and restructuring situations. Tormey is a member of the Los Angeles Chapter of FEI and also the Association of Certified Turnaround Professionals.


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Title Annotation:RESTRUCTURING
Author:Tormey, Robert
Publication:Financial Executive
Date:Oct 1, 2007
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