KEEP IT SIMPLE STUPID, ITS ALL ABOUT PROFIT

I bought a company once that had a lot of debt and a lot of very clever accountants who had dressed the debt up to hide the precarious trading situation that the company faced daily.

The purchase due diligence uncovered some of the debt but not all. The directors of the acquired company had become trapped in a negative spiral and had come to believe that as long as they could service the debt, even if it meant running a daily cash-flow meeting, they were OK.  They had stopped looking at the reasons behind the increased debt. They were out of control.  They were borrowing to pay for bad trading, bad contracts and bad decisions.  And the banks kept lending!

I sat in the office of Dwight B. Crane at Harvard Business School, pouring over the reconstructed balance sheet of the newly merged company. I was shaking my head and asking Dwight if he had any suggestions for a balance sheet strategy that would help me fix this mess.  After a long pause Dwight turned to me and said, “Tim, it is as simple as this, you’ll have to go back there and get this company to make money.”   I sat back into his soft leather sofa and burst out laughing. Dwight smiled and nodded at me.

I had been thinking about using more clever accountant tricks to reshape the balance sheet, make it prettier looking. I was about to embark on as path equally stupid as that of the pervious directors when what was needed was an honest admission of what I had bought, a PIG; no amount of lipstick could make it into a supermodel.

So I talked to Dwight a little longer and we discussed strategies to create profits, manage cash-flows and cut costs. 

Dwight’s lesson for me:  don’t try to be too clever, see things as they are and only borrow to fund future growth not poor trading or poor decisions.