Can This Company Be Saved?

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Some suppliers agreed to keep goods coming in, but only on a COD basis; some specified strict terms: keep us current within a week, two weeks. "A lot of the reason the creditors were willing to go along is Ed Ries," Brown acknowledges. "He has a very good reputation, and he's well liked and respected, so they'd go that extra mile. Then it was up to us to squeeze more days out of them. Every COD vendor that gave us one week's credit was one more week's cash flow we had right then." If, alarmed by some rumor that Cardinal was about to go under, suppliers called up to cancel the delicate arrangement, Brown would patiently repeat the litany of reassurance he kept next to his phone: the company has taken significant positive steps to improve cash flow. Expenses have been reduced. Internal systems have been streamlined -- computing, accounting, financial. Idle assets are being converted to cash.

Meanwhile, from each round of payments a few checks rebounded (including more than one made out to Multi Financial Services, a creditor on the same chancy terms as everyone else). After payroll and federal-withholding priorities, there wasn't enough money coming in, even on a rationed basis. "You take your chances with bouncing," is Brown's philosophy of crisis, "but at least you get that week's vendor or shipper in the bag." As for the next week, there was nothing for the MFS team to do until the service centers' margins were brought under control. To accomplish that, the managers were instructed to increase prices, reduce costs, cut back personnel, streamline operations, and renegotiate contracts. If an account couldn't be righted with dispatch, there was no alternative but to pull the machines.

Easy for you to say, professor. In the trenches, though, the directives did not go over well. We should go back into the plants and increase prices after we worked so hard to get the accounts? service center managers objected. "Well, you're going to have to, and not two weeks from now, but tomorrow," Walker dictated. Brown would add, to the consternation of some managers, "If we have to ration product, let's not ship it to City A, where they're losing $1.10 for every dollar of sales. Let's send it to City B, where they're making a dime."

The managers were given two targets to aim at on the weekly profit-and-loss statement each was now required to prepare -- and interpret. First, they had to raise gross margin two points from its current average of 50%, mostly by adjusting prices. Second, they had to limit expenses to 38% of sales; as sales went up and down, the manager learned to adjust spending, mainly by controlling labor. The results were calculated each Friday in a two-page flash report. If the manager met the criteria, he achieved what MFS called "threshold profitability management." If he bettered them, he achieved a salary enhancement that MFS called "a reward."

Not that Cardinal hadn't been feeding usable data into its computers all along. Upper management simply hadn't instructed the service centers to perform usable analyses of it. From the number of items that were replaced in each machine every time it was serviced, for example, MFS was able to reschedule the frequency of service to match when the machine would be almost empty. This led to the managers' devising more efficient routes for the trucks, to a concomitant reduction of labor, and to a 50% reduction in inventory required to support field operations within the first 60 days. Within the next 60 days, however, the managers appeared to have learned their lessons too well: it seemed some were purposely over-ordering and stockpiling supplies, hedging against corporate's being unable to pay the invoices.

At press time in late August, the positive cash flow promised by the end of May had yet to materialize -- but then again, it wasn't negative. Indeed, Kelly was able to pronounce with some satisfaction, "It's exactly zero." Cardinal was barely squeaking by, "but we can see the light at the end of the tunnel." He must have unusually good eyesight: sales had not responded to resuscitation, no delinquencies had been paid, and in meetings with loan officers, Brown reported, "those guys weren't smiling." One likely reason: no significant asset had yet been sold.

Still, the mere fact that the company was breathing on its own eight months later was inspiration enough. Now it was time to pin down how many cents on the dollar Bank One, Harley Hotels, the city of Sandusky, and other notes and obligations holders would accept if the settlement could be paid by, say, December 31. "If we continue to do what we're doing, maybe we'll have positive cash flow by then," says Kelly. "There's no point in working if we don't have a goal." And beyond that goal is, somewhere in the vicinity of the last row of the end zone, the possibility of -- dare it be mentioned? -- equity financing. Just as the typical MFS client wants in the first place, only without all this fuss.

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