Cash is King
Re-Thinking HR: What Every CIO Needs to Know About Tomorrow's Workforce
Cash is King
Cash flow was another Leiner blind spot. Dependent on discounters for most of its business, Leiner's accounts receivables system had to navigate a maze of in-store promotions and special pricing arrangements offered by different retailers at different times. To bill properly, the system had to keep track of each customer's sales efforts, even as they changed, sometimes from week to week. Leiner's antiquated paper-based approach to accounting simply wasn't equipped to service complex customers.
A salesperson would make a deal with a retailer and hand the contract to marketing or bookkeeping with little follow-up to make sure the data was entered correctly and the account billed appropriately.
That's why Leiner was awash in chargebacks. Customers routinely questioned the accuracy of bills, tossing the problem in Leiner's lap and asking it to provide a detailed breakdown of charges. But Leiner was unable to resolve claims quicklyif at alland many bills remained unpaid pending further investigation for up to 90 days. Significant portions of Leiner's revenue were tied up in disputes, instead of paying for ongoing business activities. "Cash flow is all about improving accounts receivables and cleaning your balance sheet for the first 13 weeks of a turnaround," says Coles. "Accurate and fast collections is an absolute priority."
Leiner hired Emagia Corp., a Santa Clara, Calif. company that makes cash flow software, to install a database management system that would monitor and store customer contracts from initial invoice to payment. To fill an order, charges and billing information had to be entered by sales, marketing or accounting staff and double-checked for accuracy before it was processed; paper orders were eliminated. In addition, no change in the size or price of a shipment request could be made without first inputting it into the cash flow system. When a retailer asked Leiner to verify a bill, Emagia's software would instantly determine where the order originated from and automatically send an e-mail to the sales or marketing staffer requesting a detailed explanation of the charges attached to the order. When it was received, it was sent back to the customer for payment.
Emagia's program produced almost immediate resultsa critical outcome for Leiner, which needed nearly instant cash to fund day-to-day operations and keep creditors at bay during the turnaround effort. Within six weeks, the software slashed Leiner's payments backlog by about 75 percent. What's more, the system now delivers daily reports to Leiner management of how many chargebacks are claimed, how much cash flow is stuck and why. Just as important, it details the bottlenecks in the billing resolution process so executives can fix the organizational weaknesses before a new round of chargebacks can occur.
By October 2001, 10 months after Leiner began its turnaround effort, the company was heading in the right direction, but it wasn't immediately obvious. Sales in the six months ended Sept. 30 had slipped by $4 million compared to the year before, thanks mostly to discontinued products and fewer customers, while Leiner's net losses increased by about $15 million, fueled by the high costs of restructuring. And although improved inventory and accounts receivables systems had helped cash and equivalents balloon to $20 million compared with less than $8 million the year before, "bondholders were betting that we would not turn around," says Coles.
That was actually good news for Leiner; its survival depended on getting out from under its onerous interest obligations, which by 2001 were running at about $40 million a year. Consequently, Leiner's management was able to work out a prepackaged bankruptcy in which bondholders accepted $15 million in cash and newly created preferred stock for their $85 million in notes. Leiner's bank covenants were extended and the company received an additional $20 million in revolving credit.
"What was impressive about this turnaround was a management team that had done business a particular way for many years, but they still understood what their problems were and what they lacked," says Peter Shabecoff, managing director at North Castle Partners, a venture capital firm that funds health and nutrition companies and the largest shareholder in Leiner. They weren't in denial; they were willing to bring in outside help and there were no ego clashes. North Castle first invested in Leiner in 1997 and as the company was going into Chapter 11, North Castle backed Leiner with an additional $20 million.
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