The Calm Before the Storm

Over the years a commonly asked question has been “What are the signs of a company headed for trouble?” While no two engagements are identical, certain common indicators appear in almost all troubled situations. Note that none of them have anything to do with numbers-and are often the root causes for deteriorating finances and operations:

• DENIAL by SENIOR MANAGEMENT that problems exist
• PARALYSIS of DECISION MAKING at senior management level
• BREAKDOWN of INTERNAL COMMUNICATIONS
• BREAKDOWN of EXTERNAL COMMUNICATIONS (between the company and its constituents, including employees, customers and creditors)
• BREAKDOWN of financial and operating CONTROLS

Mathematical Answers

For those wanting mathematical answers, a quick reference is a company’s “Z-Score”. Developed and refined over time by Dr. Edward I. Altman, a professor of finance at the New York University’s Stern School of Business, this relatively simple mathematical formula can provide initial insight to just how bad the situation may be. Links to:

• http://pages.stern.nyu.edu/~ealtman/Zscores.pdf
• http://www.creditguru.com/CalcAltZ.shtml

It is every turnaround professional’s dream to be contacted during the calm before the storm. Unfortunately, this rarely occurs.