We’ve never seen a pandemic like this in our lifetimes. It’s a crisis of epidemic proportions. Yet it’s also an incredible time to take a deeper dive while in isolation. Will you effectively lead your organization through your challenges, so it emerges stronger than ever?

We don’t know how long the pandemic will last. Don’t wait- jump on this opportunity. Know where you stand. Determine your pivots. Make your moves.

Have you ever jumped into a situation where you wondered what you got yourself into? Hopefully not as dramatic as one from my past. In one week I figured out the firm I joined that thought they had lost about 10% of sales, lost more money than they had in sales. Yet three years later, we went from our deathbed to be a thriving industry leader. I hope my insights from that turnaround will help you get through this crisis.

1. Cash Flow

• Cash is king. What’s your cash balance right now?
• Have you mapped out a 13-week cash flow? How you will get through the next quarter?
• Can you withstand an even more prolonged isolation?

When interviewing for a CFO role at a generic pharmaceutical manufacturer, a private equity partner said he had an unfair question, since I didn’t know much about the company, but what would I consider most important? I said cash flow- right answer! They had let the previous CFO go, when after a long PowerPoint presentation during a board meeting, the partner asked about cash flow. The management team had no answer. I got the role. I quickly figured out day one cash flow was in the tank. I quickly developed a plan and that first week raised an interim round of funding to keep the business operating.

2. Banking

• Where do you stand with your bank?
• If you have debt, how’s your compliance with covenants? How much cushion do you have?
• Will you need to restructure the debt?
• How solid is your bank? Will they need to call in some loans? Would yours be one?

We were already part of the special loan department of the bank. That’s not a term of endearment- rather another way of saying, “workout group”. May you never get there- you are on a short leash. Within one week, I told the bank the loss was 9X what they had been told. The bank wanted to liquidate the company for $5 million. The private equity firms would take a total write-off of their investment. However, I was able to put a plan together. After all, the generic pharmaceutical industry was about to explode, and we had great investors in JH Whitney and Morgan Stanley. With the help of the lead PE investor, we talked the bank out of selling and restructured the debt. The bank eventually got paid in full. They said it was my enthusiasm that convinced them to carry on.

3. Capital

• How well funded are you? How many quarters of cash burn do you have on hand?
• Do your investors have dry powder for follow on investments in you?
• What is their investment horizon- will they be looking to exit?
• How do your investors look at you?
o rising star who warrants more capital
o walking wounded, hoping you pull through, no more funding

We had burned through all the original equity. We needed immediate capital to pull through while we evaluated our longer-term options. I got an immediate infusion the first afternoon after learning the company hadn’t paid payroll taxes for several months- never a good idea to use this for your funding. I got an additional infusion a week later to keep suppliers paid under extended payment terms. I then created a business plan with the PE firms. Fortunately, they had the capital and still believed that there was a terrific opportunity ahead in generics. They decided to push ahead, putting in a major second round of funding and bringing in two other PE firms to participate. While at times it may have felt like we were the walking wounded, we emerged from the swamp and became a rising star.

4. Receivables

• How does your AR aging look?
• Do you need to jump on collecting older balances, send any out to collection?
• Are there chargebacks or disputes to be resolved?
• Do customers pay you first or your competitors? Do they only catch up when ordering?

Collections had practically dried up. Customers had expected we were going out of business. It was better for them to pay other suppliers who could keep getting product in their hands. I got involved, making the larger collections calls and getting the word out we were still open for business. I also changed our collection processes- bringing in a stronger AR person who moved at a faster pace as well as burned the outdated manual ledger cards. We got the AR cleaned up as well as made it easier for our sales reps to generate new orders. We were back in business.

5. Margins and Inventory

• How well do you know your product costs?
• How are your inventory levels? What do you need to move quicker?
• Where should you rationalize your offerings?
• What is your product or service costs as a total of your customers costs?

I saw that our cost allocations didn’t match our process manufacturing throughput times. We had been allocating per unit, rather than per batch. Tiny tablets got very little labor and overhead allocated, while very large tablets got clobbered. With proper costs allocated by batch instead, we rationalized our product lines by curtailing some older lines. We pivoted away from lower margin contract manufacturing work and focused on developing our line of branded generics that had margins as high as 98%.

6. Customers

• How will your customers survive the crisis?
• How is their cash flow, collections? Will it become your problem in a few weeks?
• How important are you to them?
• How well do you understand their economics? How can you help them become stronger?
• What is their sell through? Are they backed up on your inventory?

Our largest sized tablet, even with lower cost allocations due to the small batch size, still was losing money. However, I looked at the customer perspective and saw that our selling price was only 1% of their total selling price of the product. I was able to negotiate a tripling of our selling price. The customer’s reaction- they wondered what took us so long. The price was immaterial to them and they were glad to keep a steady source of supply.

7. Suppliers

• Where do you stand with open orders? Are payables to them current?
• If supply chains tighten, are you a preferred customer they will keep supplying?
• How will they survive the crisis? How can you them pull through?

I saw we were way behind on paying suppliers, who had already cut us off from critical supplies. Instead of dodging phone calls, I reached out to each supplier to learn their situation. I then lined up an infusion of more equity from our PE investors and worked out payment plans with each supplier. The suppliers were grateful for the candor and for keeping our promise to get them whole. Later, these suppliers gave us early access to key active ingredients for developing new generics, which became a competitor advantage and one reason why we came out with several first generic products approved by the FDA.

8. Financials

• How current are your financials?
• Are your financials accurate? Does your balance sheet make sense?
• Do you have a reporting package that you can understand?

Financials were months behind. They also were grossly inaccurate. I could tell within a few days, by doing what I call, “the balance sheet walk”. I looked through the balance sheet and asked for each line item, do these numbers make sense? If the balance sheet isn’t right, then your financials aren’t right. The most glaring flaw was faulty inventory accounting. Sales and production levels hadn’t grown as planned. Rather than writing off excess production costs, they had kept capitalizing those costs to inventory, expecting that volume would pick up. In a week I cleaned up the numbers- the loss was $9 million not $1 million. Eventually I streamlined our financial closing processes. We reported preliminary the first morning after each month end. I used a one page financial summary and one page financial narrative which allowed readers to quickly grasp how we did.

9. Teams

• How is your team holding up during the crisis? How can you support them?
• How are you keeping connected? Making use of technology to foster collaboration?
• Where are gaps in your expertise? What outside help can you tap into?

People were worried. Many were already looking elsewhere. Then they saw new life coming in. They could see the investors and bank were committed. We did have to make hard choices. I had to make some personnel changes and let a few people go. They were all good people but better suited elsewhere. We brought in others who could move faster in crisis mode. We also had to shut down our facility in South Hackensack, New Jersey and consolidate into the larger Queens facility. We now were much more connected working out of one facility. The Queens personnel were happier, no longer ignored.

10. Board and Investors

• How engaged are you with your board and investors?
• What connections can they bring to the table?
• Are their gaps in your board? Do you need more diversity, different expertise?

A branded pharmaceutical firm failed to get an extension from the FDA on a patent where our firm had developed a generic alternative. We learned they were trying instead to get a tag-on in a bill through the Senate that would have extended their patent several years. Our Chairman of the Board immediately turned around from going to New Zealand. He met with Senator Kennedy and others the next day in Washington DC. He got the amendment eliminated from the bill. We eventually got the first generic version approved. No way could we have achieved that without the help of our board.

Three years later, you would not have recognized our firm. We came out with several first generic versions of products. We grew nearly 7x in revenues. We earned 54% after-tax on revenues. The bank was paid off. We held off on a third round of funding. We also said no to government incentives that had been approved- we didn’t need the money. Consumers and insurers benefited as well- we saved them hundreds of millions in prescription costs. Many years later, after a sale of the company, the new owners continued to grow the firm and sold it for $5 billion. It was an incredible turnaround from a firm that almost got liquidated for just $5 million.

None of this would have happened if we hadn’t faced reality, determined what changes were needed, and significantly pivoted our business. We leaned into the crisis, so we could rise from it.
Now is the perfect time to show what you are made of. We need strong leaders to help us collectively pull through this crisis. Do an honest assessment. Humility is strength. There is tremendous talent out there ready to help. Tap into networks like ProVisors. Take advantage of the opportunity and fill the gaps you need. You and your organization can emerge stronger from this crisis.

Jon Paul has been helping CEO’s throughout his career see greater possibilities and achieve extraordinary results. As CFO or consultant, he makes connections, helps line up capital, brings new insights and encourages collaboration. Six firms he has worked with grew very successfully, leading to exits via sale to strategic or financial buyers or by going public. Most recently, Jon just finished 2 years as CFO for Plus Products, an edibles cannabis firm he took public in Canada.

Jon Paul
ProVisors- San Jose 1
jon@valueaddedfinance.com
www.linkedin.com/in/jonfpaul
847-372-1963