THE FINANCE DIRECTOR’S TALE
Charles Tennison took his seat at the boardroom table and placed a small pile
of black-bound reports in front of him. He glanced at the six other men seated
round the table and began: “Two weeks ago, Scottish Consolidated, the lead bank
in your consortium of senior lenders, asked me to assess the viability of
Lostalot Engineering as a going concern. As you know, my firm specialises in
analysing the troubles of companies in financial distress and recommending
turnaround strategies.” He coughed softly. “Or other measures. This is my
He pushed the pile towards the middle of the table. Six hands reached out.
Tennison noticed that some were shaking.
“If you turn to the first page, you’ll find a consolidated balance sheet,” he
said. Covers flipped open and faces dropped as they took in the figures.
“I should say at the outset that compiling these figures has not been as
straightforward as I would have expected. Both your financial and management
information systems are what I would, frankly, regard as rudimentary for a
business of this size.”
“If the board had listened to me…” Arnold Ratchet, the financial director
Tennison held up his hand. “Not now, Arnold. This is no time for
Ratchet barely controlled his temper. He knew Tennison was right. He’d told
the board on previous occasions, but they’d always found reasons for doing
nothing about it. His recommendation for a £370,000 investment in new IT and
management information systems had been turned down two years ago on the grounds
that limited investment funds should be channelled to retool the Scottish
Tennison flipped open his report. “The detail is laid out on the first two
pages,” he said. “But the bottom line is this: although your EBITDA has been
positive in the past two years – just – it hasn’t slowed the growth in your
borrowings. My analysis suggests an unhealthy proportion of those borrowings are
financing increased stock and work-in-progress.”
Reg Hardiman, the chief executive, slammed his copy shut. “Sure. But what are
we to do? Customers insist we hold their stock and call it down in smaller lots.
We don’t do it, we lose their business. Right, Geoff?”
The sales director nodded morosely.
“I accept that you’ve tried to address the problem,” Tennison said. “The
trouble is you’re selling around 1,300 lines if you take into account special
versions of some components. With a catalogue like that, you need to update the
costs and margins on each line at least every six months, preferably quarterly.
Otherwise, you risk margins eroding dangerously.
“What’s brought the problem to a head is the sharp rise in metal prices over
the past year. It’s fed through into the metal products and components you use
faster than expected. You won’t have realised it because you haven’t got the
means to do regular margin analysis, but you’re now selling some products at a
“Of 38 lines I analysed, 11 were making a margin of more than 10%, but 15
were barely profitable and 12 were making losses – one a net loss of 17% on sale
price. The worst news is that the 12 loss-making lines include one of your three
“But now we know this, we can do something about it,” Hardiman sounded
Tennison turned to him: “You needed to know months ago. The last half-year’s
trading has had a serious effect on the company’s cash position. You were
already heavily over-geared. My clients want to know whether you’ll be able to
continue servicing your borrowing. Which brings me to the last page of my
report. My recommendation to the bankers.”
He turned the page. “It’s not good news.”
But it could have been – a year earlier
“And so, although the investment in a new management information system will
mean that we’ll have to delay the investment in the Falkirk factory for a year,
it will provide us with the kind of detailed cost and margin information we
urgently need at a time when all of our markets are becoming more competitive.”
Arnold Ratchet sat down and looked at the faces of his colleagues round the
boardroom table. “I’ve not convinced them,” he thought.
“I don’t think…” began Phil Partfit, the manufacturing director.
“Just a moment, Phil.” Reg Hardiman was bending a paperclip out of shape. He
always did it when he was going to recommend a tough decision. “I think Arnie’s
got a point. We’re flying blind. Take that dashboard sub-assembly we launched
last year. We know it’s a sales winner, but can we put our hands on our hearts
and say it’s as profitable as when we launched it?”
“I could find out.” Phil didn’t sound convinced.
“But we can’t calculate margins on all 1,300 lines and do it quarterly – and
that, if I understand him correctly, is Arnie’s point.”
Ratchet nodded. “So does that mean we’re approving the investment?”
Hardiman looked round the table. “Not unless anybody has a rooted objection.”
He paused. “I’ll take the silence as a yes.”
THE CHAIRMAN’S TALE
Simon Tremlett stepped out of the bright sunshine into the subdued gloom of
the entrance lobby of Twitt’s, the exclusive Pall Mall club. As if by magic, a
liveried flunky appeared at his side. “You have an appointment, sir?”
“I’m here to see Lord Stoke Poges.”
“Mr Tremlett, I presume. His lordship is in the dining room and asked me to
show you through.”
Tremlett followed the flunky down a long corridor hung with oil paintings of
distinguished past members. How he hated these places. Privilege and old money.
But the old farts on the wall were yesterday’s men.
Tomorrow’s would be men who could seize an opportunity and strike a deal. Men
like him. Hadn’t he already proved it? He’d become chief executive of Barlinnie
Oil & Gas when it was little more than a two-bit operation selling drilling
parts from a converted garage in the backstreets of Aberdeen.
In the 12 years since, he’d built it through aggressive acquisitions into a
global energy industry contractor with sales of £630m in 32 countries. And he’d
hit the magic billion within two years, he’d promised himself. The crusties in
the oil paintings would never have come near. They’d have been too busy watching
their backs to take the risks.
True, he’d sometimes cut corners – not least on the Morijos takeover two
years ago – but that’s what corners were for. Morijos’ contracts in oil-rich
Kazakhstan hadn’t proved quite as robust as they’d made out in negotiations. But
they’d come right, even if the rising book debt was giving Barlinnie’s bankers
the jitters that the company would breach its covenants.
Tremlett wondered what Stoke Poges wanted to see him about. He’d been made
chairman nine months earlier. The senior debt holders had insisted on a wise
head at the top of the table. Stoke Poges was a former cabinet secretary who
seemed just as at home in the commercial world. Sharp brain. No doubt about
“His lordship is at the corner table.”
The flunky broke into Tremlett’s thoughts. Stoke Poges looked up from a
single sheet of paper he’d been reading as Tremlett approached. He folded the
paper and put it in his inside pocket.
“Simon, please join me. I’ve ordered potted shrimps and the steak and kidney
pudding for us both. Hope that suits.”
Tremlett nodded sullenly.
“Always believed it’s the civilised thing to do unpleasant business in a
“And what might that mean?” A steward placed a plate of potted shrimps in
front of Tremlett.
“There’s something you haven’t told me, Simon.”
“About the fact that Barlinnie’s debt started to trade last week.”
“I was planning to mention it at the next board meeting.”
“You should have mentioned it before. And there’s another thing. I understand
that there’s a problem with the Kazakhstan contracts.”
“Where did you hear that?”
“Never mind where. It’s true, isn’t it.”
“Nothing I can’t get sorted.”
“That’s not what I hear. I hear that we’re losing £3.2m a month on the
contract and that we’ve been doing so since penalty payments Morijos negotiated
kicked in eight months ago.”
“We didn’t know about them. They weren’t revealed in due diligence.”
“Due diligence is supposed to find things that aren’t revealed. That’s why we
do it. But worst of all, we can’t have facts like these hidden from the board.”
“It was never my intention.”
Stoke Poges scooped up the last shrimp and chewed thoughtfully.
“You see, Simon, Hutt-Farley had a quiet word with me the other day. He’s a
member here. As you know, he heads the committee of our senior debt holders.
They’re worried we’re about to run out of cash, especially being as highly
geared as we are – and so am I.”
Tremlett fiddled with his collar..
Stoke Poges put down his knife and fork. “There’s no easy way to say this,
Simon. The senior debt holders no longer have any confidence in your leadership.
Neither do most members of the board.” He paused. “Neither do I,” he said
softly. “If only we’d had a conversation about all this six months ago…”
Six months earlier
“Good to see you, Simon. I’ve ordered the potted shrimps and steak and kidney
pudding.” Stoke Poges waved Simon Tremlett to a seat on the other side of the
corner table in the dining room at Twitt’s. “You look as though you’ve chewed a
“I wish that were all. We’ve some big problems brewing.”
“Out with it, then.” Stoke Poges consulted an engraved fob watch. “I’m due at
the Lords at two-thirty.”
“Our Kazakhstan contracts have run into trouble. It appears there were side
agreements with the Ministry of Energy about penalty payments for late delivery,
which Morijos didn’t reveal when we were doing our due diligence.”
“Are we seriously in breach of them?”
“That’s a matter for dispute, but, as you can imagine, taking a matter like
this to law in a place like Kazakhstan is risky. I’d rather back a rank outsider
at Newmarket. We’re best sorting it out through negotiation, but we’ll take a
serious short-term hit on cash flow. I don’t have to tell you the likely
implications of that given our high gearing.”
“Glad you mentioned this, Simon. We’ll find a way through it. First, we could
consider selling non-core assets. Put that on the agenda for the next board
meeting. We could also unlock some of the book debt we’ve got. As far as the
committee of debt holders are concerned, leave them to me. Hutt-Farley’s on the
wine and cigars committee here. I’ll have a quiet word. Just to reassure. It’s
all about confidence, you know. Now, there’s spotted dick and custard to
For the first time since he’d entered Twitt’s, Tremlett smiled.
THE INTERIM MANAGER’S TALE
Sarah Hertford watched her husband Tony spread marmalade liberally on his
“I didn’t know we had any Belcher’s Traditional Thick Cut in the larder,” she
“We didn’t,” Tony said, his cheek pouched with half-munched toast. “I bought
this at the corner shop on the way home last night.”
Sarah sipped her tea and watched her husband closely. She’d known him since
he was a struggling chartered accountant working for a small regional practice.
For years, he’d fought his way up through the profession. Now he headed the
turnaround team at BlinkinglongMonicker, one of the world’s largest accountancy
firms.4 Despite that, she loved him dearly.
“I normally buy Bosco’s Own Brand. I could get Belcher’s if you like, but I
think it costs more.”
“Seven million pounds more, if you want a jar in the future,” Tony said.
Sarah put down her cup. “What do you mean?”
“I mean, dear, that in about two hours I’ve got to walk into a boardroom and
tell the Belcher family – all nine of them – that they need to raise £7m by the
end of the month if they want to continue their 173-year tradition of making
marmalade and jam.”
“Will they do it?”
“Not by themselves. Ask them whether they want tea or coffee and they’ll sp
end the morning arguing about it.”
“So are they going bust?”
“In a word, yes. Unless they can face some harsh decisions. But that’s always
difficult in long-standing family firms where they think they have a right to
carry on as they always have.”
Sarah poured herself more tea. “What went wrong?” she asked.
“It’s always difficult to find a starting point for these things,” Tony said.
“But I suppose it mostly tracks back to their factory move three years ago.
Shifting to new production facilities always requires careful planning because
there’s so much that can go wrong. But, in this case, it was an accident waiting
to happen, simply because the family board members argued about everything.
“For a start, they decided to move from Leominster to an industrial estate
just outside Coventry. There was some justification for that – it meant they
were nearer to their largest customers, the main supermarket chains and they
were able to close three small warehouses dotted around the country as a result.
“What they failed to appreciate is that they’d built up a highly experienced
workforce at Leominster and most of them refused to move to the Midlands. Making
jams and preserves is a very skilled business.”
“I know,” said Sarah. “Last time I tried to make some gooseberry jam I boiled
it too long and it turned out like slabs of green concrete.”
“Yes, well, on an industrial scale you get even worse problems and the
unskilled new staff they’ve recruited at Coventry are still learning on the job.
As a result, since it opened, the new factory has been operating below capacity,
sometimes scarcely above a quarter of potential output. There have been quality
“They’ve had all the expense and disruption of a move and none of the
benefits of streamlined production they were supposed to gain. The bottom line…”
“I hate that expression.”
“Well, the fact is that they’ve now got £28m of debt resulting from the move
and reduced revenues, which aren’t able to service the debt and repayments – and
meet operating costs. The final straw was last week when Bosco’s, which buys 24%
of their output, said it wanted to pay 4% less next year for the same products.
“The fact is, Belcher’s has run out of cash. Without that £7m, it can’t
continue beyond the end of the month. Even then, the future’s bleak without a
“Better enjoy your Thick Cut while you can, darling. Have some more toast.”
Is Belcher’s toast?
Two hours later, Tony Hertford walked into the boardroom at Belcher’s Quality
Preserves. The family directors were already sitting round the table arguing
among themselves. There was old man Belcher, grandson of the original founder,
83 now, but still laying down the law. Next to him was favourite nephew
Roderick, oozing with self-confidence, but as thick as the marmalade. Beyond
him, Lady Harriet, old man Belcher’s younger daughter, married into the minor
aristocracy and still treating other board members as though they were running a
sub-committee at the Women’s Institute. The others were no better.
Tony dropped his briefcase noisily on the table. The buzz stopped and faces
turned to him. None smiling, he noticed. He paused for a few moments to build
the tension, then began.
“In eight days’ time, Belcher’s will close after 173 years of trading because
you’ve run out of money.” There was an angry murmur round the table. Tony held
up his hand to silence it.
“I explained the gravity of the financial situation at last week’s meeting
and I don’t propose to debate it, or go over it again. The purpose of this
meeting is to decide whether the company goes into creditors’ voluntary
liquidation or continues trading in an attempt to turn itself round.
“It cannot turn itself round without a further £7m in working capital from
the banks. The banks will not lend the money unless the turnaround plan I’ve
devised is implemented without amendment. First, I propose to bring back three
key managers in production, logistics and sales who left the firm when you moved
from Leominster. Two went into early retirement and the other could only find
employment as night manager in a convenience store.”
“But they wouldn’t move with us then. Why should they do it now?” growled old
“Because I’ve offered them attractive terms to do so. They will initially
come on three-month secondment. Their respective briefs will be to raise
production output to acceptable levels, reduce stock holdings to free up cash
and negotiate better terms with customers. If they are successful, they will be
offered full-time posts at higher salaries, seats on the board and equity
participation in the company’s revised capital structure. I might add that an
offer along these lines when you moved would have retained their invaluable
“But this, by itself, won’t work unless the company has fresh leadership.
Accordingly, I intend to take charge as an interim chief executive until an
appropriate person can be appointed to a full-time post. In carrying out my
self-imposed duties, I will not require your attendance at the company’s offices
in future unless specifically requested – I realise that this will not mean much
change for some of you.”
Tony reached into his briefcase and pulled out a sheaf of documents. “These
documents appoint me as chief executive and give me the powers to take such
decisions as I may deem necessary for an initial period of three months,” he s
aid. “You will sign them now – without argument – or I will walk out of the door
and tell the banks that it is not possible to implement the turnaround plan I
have in mind.”
For the first time in 173 years not one member of the Belcher family had
anything to say – as they fumbled for pens.
With thanks to AshtonPenney, where the idea germinated, Leading Corporate
Turnaround by Stuart Slatter, David Lovett and Laura Barlow (Jossey-Bass), which
describes real-life turnarounds more extraordinary than fiction, and the
Turnaround Management Association, a global beacon for the profession.