A Struggling Company Without Enough Cash1
Joe Woodman bought a small, struggling computer company. After several difficult years,
revenues started to grow, and it seemed profits were growing as well, at least according to
the financial statements. In reality, though, the business did not have enough cash to
The company’s key stakeholders, such as the bank, vendors, and investors, were applying
pressure on Joe to improve earnings and cash flow. They threatened to take over the
business if major changes were not made. About the same time, making matters worse, Joe
was notified that several contracts, constituting about 25% of his top-line revenues, would
be lost to competition.
Joe responded by laying off employees, freezing wages, and closing several marginal
operations, but these efforts were not enough. Joe was still badly in need of more cash and
professional management. To remain viable, he had three options:
1. He could negotiate a ‘capital for control’ type of exchange with the investors and the
banks. If he did this, the banks could help recruit new talent and offer interim financing
to support the company while restructuring occurred. On the downside, with this option
his status in the organisation would change significantly. Instead of being the owner, Joe
would become more of a senior manager.
2. Joe could maintain control and hire turnaround management, explaining to new
managers that the company was in a critical turnaround phase and that the
organization’s future depended on their ability to generate credibility and positive
performance within a year. He would have to disclose the wage freezes of the past 2
years and explain that he could not initially offer competitive salaries or certain
traditional benefits. If he took this option, Joe would have difficulty recruiting skilled
managers because they would not want to come to a situation with failing operations,
no operating cash, and the prospects of a dramatically dwindling revenue base. If it
succeeded, this option would allow Joe to keep control and save his reputation.
3. Joe could remain in control and hire turnaround management without fully explaining
the serious situation. He might say that the company is one of the fastest-growing
companies in the industry, and that it had just completed an operational turnaround,
had he regained profitability, and was upgrading staff to take the company to the next
level. He could support this positive picture by representing pro forma financial
information as though it were actual results. This approach probably would be successful
initially in gaining new qualified staff, but the new managers might join only to leave
soon afterward. They would probably not develop into loyal, long-term
employees because of Joe’s dishonesty. This option would give Joe the opportunity to
maintain control and keep all workers employed.
1 Adapted from Northouse, PG (2013) Leadership (6th Edition). Sage: London.