A 12-step process to financial recovery: a guide to the GFOA's new online resource.

• Author: Kavanagh, Shayne C.
• Position: Cover story

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Financial recovery is the process of recognizing, arresting, and reversing a pattern of financial decline. However, recovery is not just about stopping decline. The ultimate goal of financial recovery is to use the experience of the recovery process to make the organization more resilient than it was before the distress occurred. The Government Finance Officers Association (GFOA) has developed a 12-step process (divided into three stages) for recovering from financial distress. Exhibit 1 shows the 12-step process graphically.

The GFOA has developed a comprehensive online resource that describes the recovery process in detail, which you can visit at www.gfoa.org/financialrecovery. This article gives an overview of the recovery process and highlights some of the additional information about recovery that is available on the Web site.

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OVERVIEW OF THE RECOVERY PROCESS

The recovery process has three broad stages--bridging, reform, and transformation. The objective of the bridging stage is to get through the immediate crisis and create breathing room for making more sustainable reform. During the bridging stage, members of the organization who would lead the recovery must recognize that financial distress exists and convince a critical mass of stakeholders that this is the case. The participants must then diagnose the causes of distress and apply fiscal first aid (i.e., retrenchment) tactics to stabilize the situation. The final step of the bridging stage is to develop a recovery plan.

In the reform stage, the organization carries out the short-term recovery plan and develops and implements long-term treatments for financial distress. A critical part of the reform stage is to start a formal long-term financial planning process.

The final stage is transformation. A hallmark of this stage is institutionalizing long-term financial planning and becoming more resistant to financial distress and adaptable to a changing environment.

THE 12 STEPS

The 12 steps of the recovery process, outlined below, are part of these three stages. There is also a thirteenth step--when a recovery process fails.

1. Recognition

   The first step in recovery is recognizing that a real problem exists. Someone in a position of authority must first recognize the problem and gain a substantive understanding of it--what revenues look like for the next six to 12 months, where major expenditure pressures are coming from, and the magnitude and the nature of the total problem. For example, to what extent is the problem structural versus cyclical? Will an economic recovery solve the problem or just lessen it?

   The leader of the recovery process must also recruit supporters into the recovery process. This can be done by: crafting a message to help others recognize the magnitude and duration of the problem; demonstrating a convincing understanding of the situation to inspire confidence; and preparing immediate fiscal first aid tactics for near-term relief and to stave off panic.

2. Mobilization

   Once a critical mass of people inside the organization has recognized the need for a recovery process, it is time to mobilize for the recovery. Successful recovery is the product of a team effort. As such, a team structure is essential to the recovery process, and a strong core team is at the heart of a successful recovery. The team defines a vision of what financial recovery looks like and enlists others in supporting that vision. Team members also evaluate potential strategies for recovery and mobilize others to assist in the recovery--for example, other staff members might be recruited onto subteams to analyze important issues and recommend...