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Featured Insight

"CHARLIE DON'T SURF!"

- Riding a Wave 
Through Distress

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Ben T. Nicholson

President

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At a Glance

It is impossible to know precisely where the economy is heading, but it is progressively looking like a more challenging environment.

When the big business mountain moves, the small business rocks break loose and start rolling. The same solutions to help are not equally effective for both, and a more direct approach may be necessary. 

Soldier: “It’s really hairy in there, sir – it’s where we lost McDonald. They shot the hell out of us there. That’s Charlie’s point…”

 

Soldier: “I don’t know. It’s a…”

 

Kilgore: “What is it, soldier?”

 

Soldier: “Well, I mean it’s pretty hairy in there. It’s, it’s Charlie’s point.’’

Kilgore: “CHARLIE DON’T SURF!”

- Apocalypse Now (1979)

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As economic volatility ensues and more businesses face distress there is an element of necessity, if not a responsibility, to start from a worst-case scenario before backing into the current situation. Not only does this lead to more realistic expectations in the event of capital recovery, but also a turnaround plan is often found somewhere in the gap between liquidation and the current state. This is where operational Stress Testing has the most impact, and practically speaking, this is the basis for including the liquidation value in an asset appraisal. It’s not necessarily about doom and gloom; it’s about capital preservation in an environment of disruption.

 

So, it is where we find ourselves with the current economic conditions. No one knows what is going to happen next. Period. Experts can predict, and even influence, but so far, they have all seemed to be wrong, including the Federal Reserve with its 400+ PhDs. At the risk of sounding reductive, we might be better off if they exercised the ultimate accuracy in weather reporting – there’s a 50/50 shot it’s going to rain so bring an umbrella, or don’t. Well, there is an ominous economic overcast, and it’s starting to sprinkle. Someone is going to get soaked.

 

Player Positioning

 

Some of the best scenes in cinema bring narrative to reality. Perhaps this is one of those moments.

 

The scene above from Apocalypse Now involves surfers who were ordered by their Sargent, Kilgore, to go surfing while a tactical battle ensues against Charlie, a moniker attached to the Viet Cong. In re-characterizing the players, imagine for a moment that Charlie is economic volatility lobbing bombs at the surfers – inflation, margin compressors, energy prices, supply chains, labor challenges – and Kilgore is the Fed, fighting the volatility.

But who are the surfers? 

 

Well, effectively everyone else. The financial institutions and their borrowers with variable rate loans that are at historically unsustainable levels. The financial institutions and their borrowers facing lower revised asset appraisals. The financial institutions with diminished workout groups after having been kneecapped in the manufactured credit cycle stretch. The larger companies starting small-scale layoffs and restructurings. The consumers with rising rates, falling home prices, 40-year high inflation, plummeting stock portfolios, and increasing credit card debt.

 

And the small businesses…

 

When the big mountain moves, the small rocks start rolling

 

As recommendations of what businesses should do develop, the challenge will be that what may work for large businesses may elicit a “check is in the mail” response from their smaller counterparts. In offering help, consider more focused solutions that are not necessarily easy, but realistic and effective:

 

  • Marketing: Build a customer list and a budget based on projected returns, and focus on marketing the core products/services, not the business brand, to current customers first before seeking new markets. 

  • Price Increases: Plan it, don’t wing it. Utilize a break-even model (here) to adjust prices marginally as inputs adjust, and if operating expenses are cut, lower prices while maintaining margins to remain competitive.

  • Inventory: Align optimal inventory turnover (here), sell-off/discount the excess, and work with vendors to optimize the mix. Do not automatically buy vendor products just because they are discounted.

  • Accounts Receivable: Hand over dead accounts to collections, re-measure days sales outstanding (DSO), project future cash collection, and re-assess payment terms based on managed expectations. Monitor customers who are taking longer to pay before extending additional credit, and consider partial payments to keep DSO within range.

  • Labor: Divide staff by revenue versus non-revenue generating and where possible, trim fat and tie staff into an incentivized, performance-based model. Retain a portion of the trimmed fat but use some of the excesses to boost salaries while reallocating responsibilities.

 

More than knowing the problem this is about executing direct empirical strategies to get to solutions while maintaining day-to-day work. And if help is needed, find a way to get it. If desperation strikes and a Merchant Cash Advance (MCA) slips in, watch as it takes possession of the cash and current lenders take a back seat. It is game-over.

 

“I love the smell of napalm in the morning.”

 

“Charlie don’t surf!” implies that, despite considerable collateral damage, Charlie will not win. Kilgore ultimately orders a carpet bomb of napalm to decimate Charlie. If history repeats, our Kilgore may be forced to do the same. In the meantime, if triage strikes and the strategy shifts to finding who, how, and when to help, consider this – the guy with the most scars is way more dangerous than the one with the sharpest sword.

 

The businesses that have both will have the best shot at dodging Charlie while catching a wave.

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