Purpose
Separate the symptoms of business distress from its true root causes by running financial and operational inputs through a structured diagnostic tree — revenue, cost, balance sheet, and external shock — and produce a weighted attribution of what is actually driving the decline, so a turnaround plan attacks causes rather than wasting capital on symptoms.
When to Use
Invoke this skill when the user asks to:
- Diagnose why a business is losing money or running out of cash
- Determine whether distress is strategic, operational, or financial in nature
- Identify the root cause behind declining margins, revenue, or liquidity
- Build the diagnostic foundation for a turnaround or restructuring plan
- Distinguish a temporary external shock from a structural business problem
- Settle a disagreement among stakeholders about what is actually wrong
Inputs Required
Before starting, collect:
- Financial statements: 3 years of P&L and balance sheet (annual or quarterly), plus most recent trailing-twelve-months if available
- Cash position and runway: Current cash, monthly burn, available credit, and debt maturities
- Revenue detail: Revenue by product/segment/customer over the period, plus volume vs. price split if known
- Cost structure: Fixed vs. variable cost breakdown, headcount trend, major cost line movements
- Situation summary: 3–5 sentences on what changed and when distress became visible
- Market context: Industry trends, competitor moves, customer behavior shifts, regulatory or input-cost changes
- Management hypothesis: What leadership believes the problem is (to test, not to accept)
If volume-vs-price split or fixed-vs-variable detail is missing, estimate from the financials and flag the assumption explicitly.
Instructions
Step 1: Establish the Distress Signature
Before assigning cause, characterize the shape of the decline:
- Trajectory: Sudden cliff (single-period collapse) vs. slow bleed (multi-period erosion) vs. cyclical dip
- Primary symptom: Is the business unprofitable, illiquid, insolvent, or all three? These are different problems.
- Unprofitable: Negative operating margin — an earnings problem
- Illiquid: Profitable or near-profitable but out of cash — a working capital or maturity problem
- Insolvent: Liabilities exceed assets / cannot service debt — a balance sheet problem
- Onset timing: When did the trend break? Tie the inflection point to the financial periods.
State the signature in one sentence before proceeding. The signature steers which branch is most likely dominant.
Step 2: Run the Four-Branch Root Cause Tree
Evaluate each branch independently. For every branch, assign a verdict — Primary driver / Contributing factor / Not a factor — supported by a specific number from the inputs.
Branch 1 — Revenue Shortfall (strategic/demand causes) Is the top line the problem, and if so, why?
- Decompose revenue change into volume vs. price vs. mix
- Test for: customer concentration loss, churn acceleration, win-rate decline, market contraction, competitive displacement, product obsolescence
- Distinguish demand collapse (market wants less) from share loss (market is fine, business is losing)
- Verdict requires a number: "Revenue down X% driven Y% by volume, Z% by price"
Branch 2 — Cost Overrun (operational causes) Are costs the problem, holding revenue constant?
- Track gross margin and operating margin trend independent of revenue level
- Test for: input cost inflation not passed through, labor/headcount creep, declining productivity, fixed-cost overhang as volume fell, operational inefficiency, scope/complexity creep
- Identify whether the cost problem is absolute (costs rose) or relative (costs flat but revenue fell against a fixed base)
- Verdict requires a number: "Gross margin compressed from X% to Y%, driven by [line item]"
Branch 3 — Balance Sheet / Capital Structure (financial causes) Is the business operationally sound but financially fragile?
- Test for: over-leverage, debt maturity wall, working capital drain (receivables/inventory bloat), covenant breach risk, undercapitalization for the operating model
- Compute: leverage ratio, interest coverage, cash conversion cycle, debt service vs. operating cash flow
- Distinguish a capital structure problem (good business, bad balance sheet) from an earnings problem masquerading as one
- Verdict requires a number: "Interest coverage at X×; cash conversion cycle expanded by Y days"
Branch 4 — External Shock (exogenous causes) Is the cause outside the business's control or decisions?
- Test for: demand shock, supply disruption, regulatory change, commodity/input spike, customer-side bankruptcy, macro cycle, technology disruption
- Critical distinction: a true external shock is temporary and reverting vs. a structural shift the business failed to adapt to — the latter is really a strategic (Branch 1) failure
- Verdict requires evidence: tie the shock to a dated event and assess whether it is reverting or permanent
Step 3: Weight the Drivers and Name the Dominant Cause
- Assign each branch a percentage of responsibility for the distress, summing to 100%
- Identify the dominant cause (the branch that, if fixed, resolves the majority of the problem) vs. amplifiers (factors that worsen but don't originate the distress)
- Explicitly test the management hypothesis against the evidence — confirm, refine, or reject it
- Flag interaction effects: e.g., revenue shortfall (B1) creating fixed-cost overhang (B2) draining cash (B3) is one chain, not three independent problems
Step 4: Build the Intervention Map
Translate diagnosis into prioritized direction (not a full turnaround plan):
- For the dominant cause, name the lever class that must move (pricing, cost takeout, refinancing, demand recovery, exit)
- Sequence: which causes must be addressed first because others depend on them
- Identify the single most urgent action tied to the distress signature (e.g., liquidity-first if illiquid, regardless of root cause)
- Flag what would change the diagnosis if proven wrong (the key uncertainty to resolve next)
Output Format
- Structure: Distress signature → four-branch analysis (one block per branch with verdict + supporting number) → weighted attribution → intervention map
- Length: 1,000–1,400 words
- Format: Structured document with a summary attribution table (branch / verdict / weight / key evidence) plus prose analysis per branch
- Sections: Distress Signature → Branch 1: Revenue → Branch 2: Cost → Branch 3: Balance Sheet → Branch 4: External Shock → Weighted Attribution → Intervention Map
- Tone: Turnaround diagnostician — evidence-first, unsentimental, willing to reject the management narrative when numbers contradict it
Quality Checklist
Before delivering output, verify:
- [ ] Each of the four branches has an explicit verdict (Primary / Contributing / Not a factor)
- [ ] Every branch verdict is backed by a specific number drawn from the inputs — not a general assertion
- [ ] The four weights sum to exactly 100% and one dominant cause is named
- [ ] Revenue change is decomposed into volume vs. price (or the missing-data assumption is flagged)
- [ ] The distress signature (unprofitable / illiquid / insolvent) is stated and drives the urgency call
- [ ] The management hypothesis is explicitly confirmed, refined, or rejected against the evidence
Notes
- The most common diagnostic error is treating an illiquidity symptom as the disease — a profitable business out of cash needs a different fix than an unprofitable one, even though both "ran out of money"
- "External shock" is the most over-claimed branch; if the shock is two years old and the business hasn't adapted, it has become a strategic failure and belongs in Branch 1
- Watch for interaction chains — most distress is a sequence (demand drop → fixed-cost overhang → cash drain), and attacking the last link first wastes capital
- Liquidity always takes sequencing priority over root cause: a correct diagnosis is useless if the business runs out of cash before the fix lands
How to use this skill
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Installing in Claude Code:
~/.claude/skills/<folder-name>/SKILL.md— auto-loads in every session anywhere on your machine (recommended for skills you'll use across multiple projects)<your-project>/.claude/skills/<folder-name>/SKILL.md— auto-loads only when working in that project (recommended for project-specific skills)
Restart Claude Code or open a new session to register.
Using in Claude.ai, ChatGPT, Gemini, or other AI tools:
- Drag this file into a new chat, or copy and paste its contents
- Send your task or request as your next message — the AI will apply the skill where it fits
For Claude Code skill details: https://docs.anthropic.com/en/docs/claude-code/skills