In times of turmoil for businesses, the role of the Chief Financial Officer (CFO) becomes critically important, especially during the crucial diagnostic phase. Kevin du Roscoat, co-founder of Coactiv Partner experience several similar situation as a CFO, sheds light on this decisive step aimed at identifying the level of difficulty and urgency faced by the company.
Objective : identifying the level of urgency
The financial health of a distressed company can range from immediate urgency, requiring crisis management focused on liquidity, to moderate urgency where underperformance and operational turn around are the priorities. According to Kevin du Roscoat, anticipating these difficulties allows for a broader range of options and gives the company time to develop solutions under favorable conditions. The mantra "Cash is king" underscores that liquidity availability determines the urgency level. This early recognition is crucial for quickly moving to the resolution stage.
Tools and Analyses for an Effective Diagnosis
To accurately diagnose, three financial pillars must be scrutinized carefully:
Cash Flow: Identifying the source of the cash burn is crucial. It is then necessary to build short and medium-term cash flow forecasts, essential for understanding the urgency of the situation and the company's ability to continue its operations and payments.
Profit & Loss (P&L): Analyzing profitability and its mechanisms allows for an understanding of current performance compared to forecasts. Accurate forecasts are needed to identify significant trends and deviations, alerting to necessary adjustments.
Balance Sheet: Assessing the level of indebtedness and the possibilities for additional financing is a key step. Special attention should be paid to accounts receivable and payable to identify potential improvements in the working capital requirement (WCR) and cash flow.
Communication: A Key to Success
Once the diagnosis is made, it is vital to alert the company's leaders immediately. This swift communication allows for a detailed discussion of the situation, advising on the next steps, and deciding on the stakeholders to be informed. Reactivity at this stage is crucial for implementing effective solutions.
Towards the Next Step This initial diagnosis by the CFO is the first step towards stabilizing and turning around the company. The next article will address the concrete actions to be taken, illustrating how the CFO function, whether internal or as a service ("CFO as a service"), plays a determining role in navigating through crisis periods.
This rigorous and timely diagnosis is the foundation upon which the survival and recovery of a distressed company rest. Thus, the role of the CFO proves to be not only that of a guardian of finances but also a strategic architect of recovery.
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