BOSTON — Is your company operating in green, yellow or red mode? Applying this color scheme to your planning is a good way to use smooth periods to prepare for inevitable tough times, CFOs and other executives said at the MIT Sloan CFO Summit last week.
Green mode is when company operations are going well. You have good cash flow, the company's growing, and you're not dealing with major events. This is the time to prepare for potential upheavals.
Lisa Davidson, CFO of Fractyl Laboratories, said it's best to use this pre-transition period to take a hard look at the dashboards you're using to make sure you're watching the right metrics and have a feel for the cadence of your business so you can foresee when the next transition is coming.
What tends to happen, though, is executives use the period to launch initiatives without having visibility into what's on the horizon.
When Chris Caswell, CFO of Welch's, had just started at a previous company, the board approved a major IT overhaul, alongside other high-dollar initiatives, as part of an aggressive budget plan just as their market was about to shift. "These initiatives were good things in the long term, very positive," he said, but it fell to him to recommend a delay until they could be sure the cash would be there.
Yellow is for transitions
Once you're going through a yellow, or transitional, period, how you navigate is crucial to whether you'll right the ship or send it into a crisis.
Davidson said that, as a CFO specializing in life sciences companies, she's mostly operating in transition periods because these companies have such long pre-revenue stages. "You're venture-backed and only have cash until the next milestone," she said.
It falls to the CFO to bring together executives who tend to have different priorities when a cash crunch hits. "The product development team, the clinical team — they're all driving toward their own objectives," she said.
Because of her visibility into the company's cash picture, Davidson has to make the tough decisions others aren't positioned to make, she said. "I might slow down product development so we can get our clinical trial done or initiate more clinical sites so we can get that trial down more quickly," she said.
Companies' access to debt during these transition periods can make the difference between success or failure, but the best time for CFOs to reach out to lenders is before trouble hits, said Dan Allred, senior market manager at Silicon Valley Bank. Ideally, the lender, if there's already a relationship established with the company, will have access to the same dashboard as the CFO. Lenders can't "rely on normal reporting," he said. "Waiting for the GAAP financials is not the way to know what's going on."
By seeing what the CFO sees, the lender can identify problems early. "When you see good customers going away, that's a red flag," he said. "What we see a lot is a company not growing into its valuation."
When these signs appear, it can make sense for the company to borrow as long as it has a path for getting back to a steady place. "It could be a good time for debt, although it'll be expensive debt," he said.
What you don't want to do is wait until you're at your last 90 days of cash, he said.
Red is for being in the thick of things
The most critical time is the red period, when the transition has morphed into a crisis without a clear path forward.
Barry Kallander, president of KallanderGroup, has specialized in turning around distressed companies. He sees young executives who've never been through a tough patch before and don't prioritize well. "They forget that cash is king," he said.
When he looks at their operations, he sees executives focusing on non-critical priorities while half of the company's accounts receivable are more than 90 days old. "How come you're not working on this?" he said he asks them.
It's crucial that secured partners of relatively new companies be informed early of what's going on and that tough decisions, such as management changes and staff cuts, not be delayed. The first duty is always to shareholders, not to the employees, Kallander said.
Allred said CFOs don't do themselves any favors by pressuring lenders to make accommodations on subordination when times are good, because doing so hurts lenders' ability to be flexible when times are bad.
"Lenders are pressured to be subordinate," he said. "It's easier for lenders to be patient [during a crisis] if things are done by the book and being at the top of the stack."
