Analyse the article, Yakola, D. (2014) Ten tips for leading companies out of crisis Compare this article with Morgenson, G. (1999) When a rosy picture should raise a red flag? Focus on the issues related to banks lending and restructuring prospects.

ARTICLE 1: Even good managers can miss the early signs of distress, says McKinseys Doug Yakola, whos been running recovery programs for 20 years. The first step is to acknowledge theres a problem.

Ive seen my share of boiled frogs, says Doug Yakola, comparing companies in crisis with the metaphorical frog that doesnt notice the water its in is warming up until its too late. As the chief restructuring officer or CFO of more than a dozen turnaround situations over nearly two decades, Yakola has witnessed firsthand how managers back right into a crisis without recognizing that their situation is worsening. Theyre not bad managers, but theyre often working under a set of paradigms that no longer apply and letting the power of inertia carry them along. And if they dont realize theyre facing a crisis, they wont know that they need to undertake a turnaround, either. Ten tips for leading companies out of crisis Hes also heard the regrets: sometimes managers underestimated how critical their situation wasor they were looking at the wrong data. Others took advantage of easy access to cheap capital to stay the course in spite of poor performance, believing they could push through it. Still others got so caught up in the pressure for short-term returns that they neglected to ensure their companys long-term healthor even willfully sacrificed it. Rare among them is the executive who stepped back to review his or her own plans objectively, asking Is this what I thought would happen when I first started going down this road? Thats a problem, Yakola says, because acknowledging Even good managers can miss the early signs of distress, says McKinseys Doug Yakola, whos been running recovery programs for 20 years. The first step is to acknowledge theres a problem. 2 that your plan isnt working is a necessary first step. Yakola joined McKinseys Recovery & Transformation Services as a senior partner in 2011. Here, he offers ten ways ailing companies can get started on the turnaround work they need. 1. Throw away your perceptions of a company in distress Its next to impossible to come up with one working definition of a company in distressand dangerous to think that you have one for your own company. Depending on the situation, there are probably 25 different signs of potential distress (exhibit). The problem is seldom made up of just one or two of these things, however. Rather, it is the result of a greater number of them interacting together and with other external factors. 2. Force yourself to criticize your own plan The biggest thing you can do to avoid distress is periodically review your business plans. When youre creating them, whether at the beginning of the year or the start of a three-year cycle, build in some trigger points. A simple explicit reminder can be enough: If we dont have this type of performance by this date or we havent gotten the following 12 things done by this date, well step back and decide if were going down the right path, given whats happened since our last review. Such trigger points should be oriented both to operational and market performance as well as to basic financial metrics and cash flow. Look at where you are as a company using basic financial and cash milestones, and then look at where you are with respect to your industry and competitors. If youre not moving with the rest of the industry (or not outpacing it, if the industry is struggling), then your plan may be obsolete. And dont forget to look back at your performance over past cycles to identify any trends. If you keep missing performance targets, ask why. 3. Expect more from your board The beauty of a board is that it has enough distance from the company to see the forest for the trees. Managers often treat their board as a necessary evil to placate so they can get on with their business, but that undermines the boards role as an early-warning system when a company is heading for distress. Its also the boards responsibility to look the CEO, the CFO, and the chief operating officer (COO) in the eye and say, OK, we like your plan. Now lets talk about what it would take to cut costs not just by 3 percent but by 20. Lets talk about all the things that can go wrongthe risks to the business. Sometimes significant events happen that no one could have foreseen, of course. But in a typical distress situation, a company has usually just had 18 to 24 months of poor performance, and the board hasnt been aware or hasnt asked the right questions. Independent board members truly independent onescan have a big impact here. The senior team at one company maintains a list of risks to the business, employees, and the plan. They review those risks with the board on a quarterly basis to ensure that theyre staying top of mind. Its an excellent way to have conversations that you wouldnt normally otherwise have in a business operation. 4. Focus on cash A successful turnaround really comes down to one thing, which is a focus on cash and cash returns. That means bringing a business back to its basic element of success. Is it generating cash or burning it? And, even more specifically, which investments in the business are generating or burning cash? I like to think about this in the same way one would if running a local hardware store. By that, I mean asking fundamental questions, such as whether there is enough cash in the register to pay the utility bill, for example, or to pay for the pallet of house paint that will arrive next week, or how much more cash I can make by investing in a new delivery truck. When you bring a business back to those basic elements, the actions you need to take to get back on track become pretty clear. In many of the cases I have seen, the management team and board are focused on complex metrics related to earnings before interest and taxes (EBIT) and return on investment that exclude major uses of cash. For example, variations on EBIT commonly exclude depreciation and amortization but also exclude things like rents or fuel. These are all fine metrics, but nasty surprises await when no one is focused on cash. Keeping track of cash isnt just about watching your bank balance. To avoid surprises, companies also need a good forecast that keeps a midterm and longer view. For example, failing to pay attention to the cash component of capital investments routinely gets companies in trouble. Project net present values can look the same whether the return begins gradually at year two or jumps up dramatically at year five. But if youre not focusing on the cash that goes out the door while youre waiting for that year-five infusion, you can suddenly find yourself with very little cash left to run the business, sending you into a spiral you may not recover from. 5. Create a great change story Companies in distress dont focus enough on creating a change story that everyone understands and that creates some sense of urgency. Heres an example. I recently did a turnaround as chief restructuring officer of a mining company. It was profitable, returned a decent margin, and was cash positive. But the commodity price was dropping, and the board was worried about generating enough free cash flow to drive the capital needs of the business. The change story we created said, Yes, we are profitable. But the whole point of profitability is to generate enough cash to expand, grow, and maintain operations. If we cant do that, then were headed for a long, slow decline where equipment breaks down and lower production becomes the new reality. If you can tell that story in a paragraph or less, in a way that means something to the average guy on the front line, then people will get on board. In this case, employees wanted to have their children and their grandchildren work for this company in the same remote mining location, and the change story spurred them to action. The key was a simple message, not fancy metrics. 6. Treat every turnaround like a crisis Without a crisis mind-set, you get a stable companys response to change: risk is to be avoided, and incrementalism takes over. Your workers are asked to do a little more (or the same) with less. More aggressive ideas will be analyzed ad nauseam, and the implementation will be slow and methodical. In contrast, a crisis demands significant action, now, which is what a distressed company needs. Managers need to use words like crisis and urgency from the first moment they recognize the need for a turnaround. A company thats in true crisis will be willing to try some things that it normally wouldnt consider, and its those bold actions that change the trajectory of the company. Crisis drives people to action and opens managers up to consider a full range of options. 7. Build traction for change with quick wins The tendency of most managers is to put all of their focus and resources into three or four big bets to turn a company around. That can be a high-risk approach. Even if big bets are sometimes necessary, they take a lot of time and effortand they dont always pay off. For example, say you decide to change suppliers of raw materials so you can source from a low-cost country, expecting 30 percent lower direct costs. If you realize six months later that the material specifications dont meet your needs, youll have spent time you dont have, perhaps interrupted your whole production schedule, and probably burned a bunch of cash on something that didnt pay off. In addition to going after big bets, managers should focus on getting a series of quick wins to gain traction within the organization. Such quick wins can be cost focused, cutting off demand for some external service they dont need. Or it could be policy focused, such as introducing a more stringent policy on travel expense. Not only do such moves improve the bottom line, they also generate support among employees. In any given company, youre likely to find that a fifth of employees across the organization are almost always supportive. They work hard. And they will change what theyre doing if you just ask them. These are the people youll want to spend most of your time with, and theyre the ones youll promotebut youll probably spend too much time with the bottom fifth of employees. These are the underachieving ones who actively resist change, look for ways to avoid it, or are simply high maintenance. What often gets ignored is the remaining 60 percent of the organization. These are the fencesitters, and they are tuned into action, not just talk. They see the changes going on, and if you proactively work with them, then 80 percent of the organization will be behind you. But if you dont give them a reason to stand up and be positive about the company, theyll go negative. Thats the importance of quick wins. When you quickly take real action, and when those actions affect the management team as well, you send a powerful message. 8. Throw out your old incentive plans Management incentives are often the most overlooked tool in a turnaround. In stable companies, short-term incentive plans can be a complex assortment of goals related to safety, financial and operational performance, and personal development. Many are so complex that when you ask managers what they need to do to earn their bonus, many just shrug their shoulders and say, Someone will tell me at the end of the year. In a turnaround, take a lesson from the privateequity industry and throw out your old plans. Instead, offer managers incentives tied specifically to what you want them to do. Do you need $10 million of improvement from pricing? Then make it a big part of your sales staffs incentive plan. Need $150 million from procurement? Give your chief purchasing officer a meet-or-beat target. Be willing to forgo bonus payments for those that dont achieve 100 percent of their targetand to pay out handsomely for those whose results are beyond expectations. 9. Replace a top-team memberor two Experience tells me that most successful turnarounds involve changing out one or two top-team members. This isnt about bad managers. In my 20 years of doing this, Ive only seen a small handful of managers I thought were truly incompetent. But its a practical reality that there are managers who must own the decline. And more often than not, they are incapable of the shift in mind-set needed to make fundamental changes to the operating philosophy theyve believed in for years. Whether they realize it or not, they block that change because theyre bent on defending what they believe to be true. Although its difficult, removing those people sends another signal to your stakeholders that there will be changes and youre not afraid to make tough moves. 10. Find and retain talented people Beyond the leadership team, there are two types of people I look for immediately. First are those that have the institutional knowledge. They may not be your top performers, but they know all the ins and outs of the companyand are vital to understanding the impact of potential changes on the business. Many times they are the disgruntled ones, unhappy with the companys performance. But you need people who are willing to point out the uncomfortable truths. A turnaround is also a real opportunity to find the next level of talent in an organization. Ive been through multiple crises where the people who added the most value and impact werent the ones sitting around the table at the beginning. I have often found great leaders two and three levels down who are just waiting for an opportunityand the fact that they can be part of something bigger than themselves, saving a company, is often enough to attract and retain them. For both groups, its important to realize that retention isnt always about money and bonuses. Its also about figuring out the individuals needs. Good turnaround managers actively look for those people and find a way to get them involved.

ARTICLE 2

Investing When a Rosy Picture Should Raise a Red Flag Accounting Tricks That Mask Performance W VS ca of Sales THE NEW YORK TIMES, SUNDAY, JULY 18. 1999 UNSUSTAINABLE SALES The tesi revelas are those that contine year and year out. Temporary increases are uss valuable and should garner a lower price-to-earrings multiple for a compuy. Mr Olstein sees Trican Global Restau rants, owner of KHC, Taco Bell and Puzza We as an example of company wooking emporary income i.ilst year, it suid ces. !!!!ULL franchises earth 82.8 millior, er There's nothing wrong with it," Mr. Olster said Suc it's not ergoing, sot should clity a lower P'E. RESERVES TO THE RESCUE? If a company puts aside too much no reserves that it Urnings forecasts. Among the canina. uses later, that could ask iu slowdown in its By GRETCHEN MORGENSON lies Mr. Cisti business. Mr. Olstein said. An example of a concerned about is company that may va reserves to smooth ITH stock prices near their highs Shared Medical Sys Out its earnings is Microsoit, he added The and corporale carn:ngs lacking tems, which supplies company recently said that the S.C. great investors might think they information manage investigating the way it ac cunts for re. can take a vacation from the grunt work of ment systems to the serves: industry experts thinx the Comas ar Tuzing curspany financial statements. health cure industry. sion may be looking for evidence of so-called i misrake, says Robert A. Olstein, a 30- Co the first quarter of cuckle.jar account Year Veteran of financial analysis and the 1999, che cortpany re- ung, in which rezerves manager of the Olstein Financial Alert Giu crted net income of $18 million and cash are se: aside In case qual fund. Mr. Os ein chirks that investors Flow ch $10 million. they are reeded later Tust be especially vigilant slow against Why the disparity? Among other things, 9 bolster flagging accouc tricks that, while legal, maska PT: Ostein Tournal accounts receivable ealthings company's real!lancial performinca were rising almost 50 percent fuster than Alle! the an One reason o be waichiul, he said, is that reventies, white accrued expenses, a re- nouncemeat Greg companies may be reaching to meet 13 serve set lip by the company for future Diaffe, Microsoft's lyses' axpectations. A lot of companies are payments, Ceil 30 percent in the quarter. The Clue Filicial fli- using accounting ahenanigans to project cer, said "Ve are alvin Campany's chict financial officer was un- smooth earnings patas that rarely exist." he 15 kila lu' CX-49., 1 Vilable for content last week. 52 Investors neec cu sos behind the surised at oncone was examine our BALANCE-SHEET DISPARITIES Surretinies 2.L!be's." books and suggest atherwise." The Series and Exchange Commis. there is a diference betweeri earnings re. DEFERRED EXPENSES A company's sts Sior wrees. One commissioner Norman S. parted to shareholders and those reported to should be matched against the revendes the internal Revenue Service. johnsol, said in a spech carlier this year thal managers earnings are a cop enforce Companies carry two sets of books, one they produce. Companies that lefer lige for shareholders and one for the i.R.S. Foot- amounts of current experises in der per ment priority. Larely a week goes by Witz- out an announcement that another larye natcs to financial statements reconcile chem orts ught to he monitorul, M. Olstein Suys. by comparing income taxes currently pay Deferrerl expenses show up us all set to company is rescatartg its pas: results," Mr. the balance sheet ind i LUCIL2d over Johnson Suid. (Last week it was Meksson uble the I.R.S. version with the taxes a time. The footnote which in der HBOC's turn, for the second time this year) ruinpany has deferred, the results of which Ulstein's !und altas to buy companies shareholders are deca Is its assumpcons on the long chest 11. solid eachings and hers against those A company reporting higher earnings to asses will have value is un irryturae piecu whose financial performance looks more shareholders through the use of deferred of the puzzlu ond slould be chicken fur econistic reality mythical than real. The fund is up 30.96 taxes should be scrittinized. Mr Olstein Mr. Ols.ein lilled percent this year and an average of 28.39 says. He escimares that about ace in six to Antericu Dutine Derceni a year since it opened in 1995. corripanics all inco chis category Amouable a company that is it During three decades on Wall Street, M. cxample was in 199". when the Sunbeam Otstein has identified a number of red flags Daily N. LISEC Corporation reported earnings ci $289 imal- Claire lletri ui financial st.icnients. What these alerts lion. Current Lixes on :: Drive 119 help to show is if there i deviations be ic income were $9.4 MISIS. lls defend rween the statements as portrayed by the inillion bur deferred marka casis in CUTIpany and economic reality," he said income taxes were The mil 990's were EARNINGS VS. CASH FLOW Mr. Osteur $55 million. T. greater than its earn- examines what a cumany serierates in was Jr. aier that the ings, he said Subscribers, teanwhile, can- cash flow from its operations. A company Company was report ccled their accounts or quickly than with excess casta low can razse dividends & Xorially higher America Online wrotcilerts of the campa and survive tough times without being rings to share y changed is policy is October 1908 ta forced to borrow or sell assets. noise rar a thu recognize marketing denses as they are To calculate a company's cash row, start LR.S. Vi Cisternal with nec Incare. Acid back what it has taken Sunbeam loturandi depreciatiua expenses and activats pey carnings by wade marges, cud 5 Sock able. Then subtract capucal expenditures. plungen nventaries and accounts receivable. Watch ou, Mr. Oistein said, if nec ir.com s murh higher than cash flow. The compa y may be speeding or slowing its booking of come or cases, perhaps to me ana'ysis CE DO 00 incurred; Mr. Olstein said lie though the Occouliag sluit conributed to cha starp rise in its stock ACQUIRED PROFITS Under purchase account 1.18un acquisition is included in the buyer's financial statements from the date of the purchase. To make sure that a company's Cilm S are no solely a result of cuisitiis, investor's can examine polar- ta Cilistings - the nutcm of the com- hitled companies the acquisitado llad been matu at the begin ning of the year For example, starr. ing 299.7. HFSnow part of the Centar Corporation, report- Lu eurings growch rules of wore than 30 perlen, owing kirge ly (Acquisirions. The Tule at which the cultpty's warnings grew. IDC including cruisicions, was an estimated il percent, Mr. Olstein Horn, according to figures found in the faulnotes ru the financial Nirements. Reality caught to the perccp- In Condant's growih lille in April 1992, OriLl its stuck fall by hall. INVENTORY ANU RECEIVABLES Sluwet triven- inly turnover 'sing LLCOURIS l'eceivable can signal salus louwil. To calculare inven- tovy Curtover, ada in- yether a company's eventory position at The start und end up a pero and Civide it in full. Then divide the company's revenues by ile result. Analysts measure receivables by assessing huw many ways of sules are held is the leceivables category. Tirs, they figure il cony's daily salus, laking the year's revenue and dividing it by 165. Then they cake the accounts receivable and divide by the daily sales number. A company recently experiencing both slower inventury turnover and rasime receiv. ables, Mi'. Olstein said, is Xerox He had owned the stock hut becaine concerted at ihe end of 908, Wien (Rigs in both inven. tories and receivables weakened. Jeffrey J Sumuk, a Xerox spnkesman, said those were "just wa factors, both inward looking, "There are a host of other facrors we would consider particularly important," Mr. Simek continued WATCHING WRITE-OFF$ Comparing the re- ported earnings of a company with its re- tained earnings - what it actually nets each year - is u reventing exercise for share. holders in companies that take reorganiza- tion or other charges regularly Such churges, Mr. Olstein said, can distorteam ings. If a company's retained earnings be- fore paying dividends are not growing 15 much as its reported carcincs before write offs," he said, the charges may be masking under performance. CORE CUTBACKS Some corporate expenses, Like those for research and development at a techinuingy company are crucial to future growth and should nut be cut, though doing so may make for a belie: looking carnings repori Mr. O!ster cited Eastman Kodak as one such company that has recently cut irportant l'esearch costs. In the fourth quarter of 1998, IC ) nounced a reduction in R. D. costs that contributed 31 percent of its earnings. Paul Allen, a kodak spokesmon, said the decime was part of the company's broad effort to cut costs. "We sill spend $1 billion on R.& D." Me Allen said. "We have deter- mined list combined R&D and sales, gen- eral and administrative costs in the neigh- borhood of percent of revenues is a good financially prudent position for us to be in." Mr. Olstein is not so sure. "Technology companies," he sala, "should not derive their growth rate from Cuts in research." Investing When a Rosy Picture Should Raise a Red Flag Accounting Tricks That Mask Performance W VS ca of Sales THE NEW YORK TIMES, SUNDAY, JULY 18. 1999 UNSUSTAINABLE SALES The tesi revelas are those that contine year and year out. Temporary increases are uss valuable and should garner a lower price-to-earrings multiple for a compuy. Mr Olstein sees Trican Global Restau rants, owner of KHC, Taco Bell and Puzza We as an example of company wooking emporary income i.ilst year, it suid ces. !!!!ULL franchises earth 82.8 millior, er There's nothing wrong with it," Mr. Olster said Suc it's not ergoing, sot should clity a lower P'E. RESERVES TO THE RESCUE? If a company puts aside too much no reserves that it Urnings forecasts. Among the canina. uses later, that could ask iu slowdown in its By GRETCHEN MORGENSON lies Mr. Cisti business. Mr. Olstein said. An example of a concerned about is company that may va reserves to smooth ITH stock prices near their highs Shared Medical Sys Out its earnings is Microsoit, he added The and corporale carn:ngs lacking tems, which supplies company recently said that the S.C. great investors might think they information manage investigating the way it ac cunts for re. can take a vacation from the grunt work of ment systems to the serves: industry experts thinx the Comas ar Tuzing curspany financial statements. health cure industry. sion may be looking for evidence of so-called i misrake, says Robert A. Olstein, a 30- Co the first quarter of cuckle.jar account Year Veteran of financial analysis and the 1999, che cortpany re- ung, in which rezerves manager of the Olstein Financial Alert Giu crted net income of $18 million and cash are se: aside In case qual fund. Mr. Os ein chirks that investors Flow ch $10 million. they are reeded later Tust be especially vigilant slow against Why the disparity? Among other things, 9 bolster flagging accouc tricks that, while legal, maska PT: Ostein Tournal accounts receivable ealthings company's real!lancial performinca were rising almost 50 percent fuster than Alle! the an One reason o be waichiul, he said, is that reventies, white accrued expenses, a re- nouncemeat Greg companies may be reaching to meet 13 serve set lip by the company for future Diaffe, Microsoft's lyses' axpectations. A lot of companies are payments, Ceil 30 percent in the quarter. The Clue Filicial fli- using accounting ahenanigans to project cer, said "Ve are alvin Campany's chict financial officer was un- smooth earnings patas that rarely exist." he 15 kila lu' CX-49., 1 Vilable for content last week. 52 Investors neec cu sos behind the surised at oncone was examine our BALANCE-SHEET DISPARITIES Surretinies 2.L!be's." books and suggest atherwise." The Series and Exchange Commis. there is a diference betweeri earnings re. DEFERRED EXPENSES A company's sts Sior wrees. One commissioner Norman S. parted to shareholders and those reported to should be matched against the revendes the internal Revenue Service. johnsol, said in a spech carlier this year thal managers earnings are a cop enforce Companies carry two sets of books, one they produce. Companies that lefer lige for shareholders and one for the i.R.S. Foot- amounts of current experises in der per ment priority. Larely a week goes by Witz- out an announcement that another larye natcs to financial statements reconcile chem orts ught to he monitorul, M. Olstein Suys. by comparing income taxes currently pay Deferrerl expenses show up us all set to company is rescatartg its pas: results," Mr. the balance sheet ind i LUCIL2d over Johnson Suid. (Last week it was Meksson uble the I.R.S. version with the taxes a time. The footnote which in der HBOC's turn, for the second time this year) ruinpany has deferred, the results of which Ulstein's !und altas to buy companies shareholders are deca Is its assumpcons on the long chest 11. solid eachings and hers against those A company reporting higher earnings to asses will have value is un irryturae piecu whose financial performance looks more shareholders through the use of deferred of the puzzlu ond slould be chicken fur econistic reality mythical than real. The fund is up 30.96 taxes should be scrittinized. Mr Olstein Mr. Ols.ein lilled percent this year and an average of 28.39 says. He escimares that about ace in six to Antericu Dutine Derceni a year since it opened in 1995. corripanics all inco chis category Amouable a company that is it During three decades on Wall Street, M. cxample was in 199". when the Sunbeam Otstein has identified a number of red flags Daily N. LISEC Corporation reported earnings ci $289 imal- Claire lletri ui financial st.icnients. What these alerts lion. Current Lixes on :: Drive 119 help to show is if there i deviations be ic income were $9.4 MISIS. lls defend rween the statements as portrayed by the inillion bur deferred marka casis in CUTIpany and economic reality," he said income taxes were The mil 990's were EARNINGS VS. CASH FLOW Mr. Osteur $55 million. T. greater than its earn- examines what a cumany serierates in was Jr. aier that the ings, he said Subscribers, teanwhile, can- cash flow from its operations. A company Company was report ccled their accounts or quickly than with excess casta low can razse dividends & Xorially higher America Online wrotcilerts of the campa and survive tough times without being rings to share y changed is policy is October 1908 ta forced to borrow or sell assets. noise rar a thu recognize marketing denses as they are To calculate a company's cash row, start LR.S. Vi Cisternal with nec Incare. Acid back what it has taken Sunbeam loturandi depreciatiua expenses and activats pey carnings by wade marges, cud 5 Sock able. Then subtract capucal expenditures. plungen nventaries and accounts receivable. Watch ou, Mr. Oistein said, if nec ir.com s murh higher than cash flow. The compa y may be speeding or slowing its booking of come or cases, perhaps to me ana'ysis CE DO 00 incurred; Mr. Olstein said lie though the Occouliag sluit conributed to cha starp rise in its stock ACQUIRED PROFITS Under purchase account 1.18un acquisition is included in the buyer's financial statements from the date of the purchase. To make sure that a company's Cilm S are no solely a result of cuisitiis, investor's can examine polar- ta Cilistings - the nutcm of the com- hitled companies the acquisitado llad been matu at the begin ning of the year For example, starr. ing 299.7. HFSnow part of the Centar Corporation, report- Lu eurings growch rules of wore than 30 perlen, owing kirge ly (Acquisirions. The Tule at which the cultpty's warnings grew. IDC including cruisicions, was an estimated il percent, Mr. Olstein Horn, according to figures found in the faulnotes ru the financial Nirements. Reality caught to the perccp- In Condant's growih lille in April 1992, OriLl its stuck fall by hall. INVENTORY ANU RECEIVABLES Sluwet triven- inly turnover 'sing LLCOURIS l'eceivable can signal salus louwil. To calculare inven- tovy Curtover, ada in- yether a company's eventory position at The start und end up a pero and Civide it in full. Then divide the company's revenues by ile result. Analysts measure receivables by assessing huw many ways of sules are held is the leceivables category. Tirs, they figure il cony's daily salus, laking the year's revenue and dividing it by 165. Then they cake the accounts receivable and divide by the daily sales number. A company recently experiencing both slower inventury turnover and rasime receiv. ables, Mi'. Olstein said, is Xerox He had owned the stock hut becaine concerted at ihe end of 908, Wien (Rigs in both inven. tories and receivables weakened. Jeffrey J Sumuk, a Xerox spnkesman, said those were "just wa factors, both inward looking, "There are a host of other facrors we would consider particularly important," Mr. Simek continued WATCHING WRITE-OFF$ Comparing the re- ported earnings of a company with its re- tained earnings - what it actually nets each year - is u reventing exercise for share. holders in companies that take reorganiza- tion or other charges regularly Such churges, Mr. Olstein said, can distorteam ings. If a company's retained earnings be- fore paying dividends are not growing 15 much as its reported carcincs before write offs," he said, the charges may be masking under performance. CORE CUTBACKS Some corporate expenses, Like those for research and development at a techinuingy company are crucial to future growth and should nut be cut, though doing so may make for a belie: looking carnings repori Mr. O!ster cited Eastman Kodak as one such company that has recently cut irportant l'esearch costs. In the fourth quarter of 1998, IC ) nounced a reduction in R. D. costs that contributed 31 percent of its earnings. Paul Allen, a kodak spokesmon, said the decime was part of the company's broad effort to cut costs. "We sill spend $1 billion on R.& D." Me Allen said. "We have deter- mined list combined R&D and sales, gen- eral and administrative costs in the neigh- borhood of percent of revenues is a good financially prudent position for us to be in." Mr. Olstein is not so sure. "Technology companies," he sala, "should not derive their growth rate from Cuts in research