During the Texas oil boom of the 1980s, I was contacted by a company (I’ll call it Grant Corp.) to help get its finances in order. I walked into a financial meltdown and in the course of my work uncovered a slew of management errors — and even some full-on deceit and treachery — that was bringing the company to ruin.
A Company Background
Grant was founded by ex-geologists from what we’ll call Humble Oil Company and included gas pipeline and oil and gas exploration and production subsidiaries. The founders hired a chief executive officer who was successful at promoting public drilling partnerships through two prestigious national investment firms. As a result, both cash flow and operational commitments exploded as investor money flowed in for exploration projects. The CEO was cutting deals faster than the company could keep up. Overhead exploded as employees were hired to play catch up with operational commitments, accounting, public filings, and the investor reporting required for more than 20 public drilling funds.
The oil boom ended and the chickens came home to roost. The company was over leveraged, payroll was bloated, public filings for the drilling funds were delinquent, and accounting was in shambles. The banks forced the company into bankruptcy.
Grant Corp. faced a multitude of problems that I’ll address in future blogs but, for this article, I’m going to focus on the primary factor that took the company from a time of great opportunity to bankruptcy.
This lesson applies to all industries in analyzing growth opportunities. What happened here isn’t unique. I’ve been involved in other, almost identical, circumstances. I have tremendous respect for entrepreneurs, but they don’t always get it right.
Failure to Match Opportunities with Capabilities
Management failed to adequately consider all that was required to deliver on their investor expectations. They underestimated all obligations and overhead costs associated with managing exploration and production operations, controlling operational costs, accounting, and reporting to investors and lenders. They didn’t plan for growth in organizational capabilities to support increased activity.
Staff quickly became unable to keep up with the workload and operational controls broke down. This began the downward spiral as employees began spending so much time dealing with the resulting crises that they fell farther and farther behind in their work, creating more crises. Cost overruns occurred; vendors weren’t being paid on time; SEC filings were delinquent.
Management’s solution was to hire more staff, who would initially divert existing staff for training. However, because they didn’t address the breakdown in operational controls, they just wound up with more staff dedicated to putting out more fires.
Management already recognized that the lack of operational controls was a significant part of their problem. My first task was to map the flow of financial information though the company and identify internal control weaknesses. This gave me an opportunity to understand how future revenue could be predicted from production reports, to see information silos that prevented vendors whose services were critical to operations from being given payment priority, and to identify other barriers to current and accurate accounting. One internal control weakness was a failure to separate the authority to control cash from the ability to control accounting for cash. (I subsequently uncovered a significant embezzlement that had occurred. More on this in a later post.)
Once we had these operational controls in place, I implemented the process that allowed us to get accounting current and played a significant role in reducing staff from more than 30 accountants to 10. I recommended that we break the staff into two groups.
One group was responsible for maintaining accurate and current accounting from that date forward while the second group was responsible solely for assuring that accounting transactions prior to that date were complete and accurate. The second group was put on notice that, upon completion of their work, they would receive a generous severance package.
Next up: building communications and shared decision-making.