Business Turnaround Strategy

Turnaround-Indecision1

Business Turnaround Strategy

The nagging questions:

  • Is the company faltering, out of control, heading towards distress?
  • What strategy do I employ to turnaround the business?
  • How do I identify the real problems the company is facing?
  • What actual resources do I have to employ an effective turnaround?

This site is design to provide restructuring and turnaround tools, checklists, information, and programs that assist in determining whether a business is in decline or distressed and provide means to revitalize the business to sustained profitability and to enhance enterprise value.

The facets of a business restructuring and turnaround involve formulation and implementation.  Just because a turnaround and restructuring program has been agreed upon, the enterprise risk remains high.  The problem can be:  (a) the strategy is flawed, (b) the strategy is good, however poorly implemented, or (c) the strategy is poor and poorly implemented.

Business Life CycleSurprisingly, turnaround involves applying traditional management techniques mainly by following best practices in rather unusual environments.  The business is distressed, both in cash and time are in short supply and rapid restructuring is required. For the company owner or management, improving the short-term performance of the business is desired.  This would be a mistake.  Depending on the stage where the company is in the business life cycle and the attributes of the business will dictate the turnaround approach. The approach for start-ups and high-growth companies is different then the approach required for a mature low-growth business.

SWOT-AnalysisCauses of Business Decline and Failure

Determining what constitutes a turnaround and restructuring situation is not easy.  Too often business owners and executives focus on the symptoms of the business decline rather than determining the causes of the business decline.

Symptoms of Business Decline

Some of the common symptoms of business decline can be noticed by a rapid turnover of senior management and employees, factoring customer invoices, declining customer services, increased disputes with leading suppliers, the stretching of supplier payables, the build up of inventory, and the low employee morale pervasive through the company.

Causes of Business Decline

Both internal and external issues can cause business deterioration.

Cross MarkInternal causes:  high costs, the lack of an effective marketing effort, implementing big projects that places a drag on the organization, implementing acquisitions, following weak financial policies and organizational confusion, and;

XMarkExternal causes: changes in market demand, competition, and adverse movement in prices i.e., energy, currency, supplier terms.

Widely known and most often the causes of business decline includes:

  • PorterPoor Management—an ineffective management team incapable of steering the direction of the company, the neglect of the core business (the foundation), and/or lack of management depth (deficient in experience or knowledge).
  • Inadequate financial controls—from weak cash flow forecasting, ineffective or no costing system in place, loss or no budgetary controls, and/or failure to capture or monitor key performance indices.  This also encompasses not using an effective management accounting system, having in place an organizational structure that obstructs effective controls, and not understanding proper overhead allocation methods that distorts business unit and product/service costs and profitability.
  • Poor Working Capital Management—failure to manage the company’s short-term resources that embraces controls over cash and the cash conversion process in order to meet current obligations has resulted in a liquidity crunch.

The Basic Requirement for a Successful Turnaround

Not all distressed businesses can be rescued.  Understanding the business components is necessary in determining if the business can be salvaged.  Businesses with little to no chance of survival should to operation to maximize creditors’ return. Answers to the following is important:

Check-Mark1Does the company have a viable core business?

Does the company have access to adequate short-term financing?

Does the Company have adequate tangible and intangible resources and skills?

 

The stakes in a business restructuring and turnaround situation are big and have many dimensions.  The timing constraints can be immense.  As many stakeholders are involved, dealing with the complexity of angry creditors, frightened employees, cautious customers, and highly concerned directors require prudent and decisive decisions.

Essential Generic Ingredients for a Successful Turnaround

Crisis Stabilization—the objective is to conserve cash liquidity that will provide a “window of opportunity” to develop a turnaround plan and time to restructure the business and finances. One tactic is to institute an Emergency Cash Management Triage.

Leadership—the objective is to reconfigure manage for the restructuring period and for when the business to head toward sustained performance.zscore

Stakeholder Buy-in—the objective is to rebuild relationships with key debt and equity providers, creditors, suppliers, customers, management and staff, and governmental regulators.

Strategic Focus—the objective is to redefine the business and develop the restructuring plan’s strategic moves for a successful turnaround.  This can possibly call for product refocusing and implementing a divestiture, operational realignment, or outsourcing of non-core activities.  Although the solution tends to be simple in concept, the restructuring and turnaround plan is more complex in its execution.

Organizational Change—the objective is to adjust the organizational structure, motivate staff, build capabilities, and enhance the employee conditions.  A confused organizational structure, a paralyzed middle management, resistance to change and a demoralized work force are typical symptoms of a company in trouble.  The purpose of organizational change is the alignment of the organizational structure with new organizational goals and strategies.

Successful Change IngredientsCritical Process Improvements—the objective is to enhance core and support processes.  Problems are characterized by high costs, poor quality, and inflexible responsiveness.  Part of the problem can be attributable to outdated and the poor condition of the physical infrastructure such as the property, plant, and equipment.  The company’s legacy technology system may be exacerbating problems.

  • Time improvement—focusing on making the business more responsive and flexible
  • Cost improvement—focusing on optimizing processes to reduce variable and fixed costs
  • Quality improvement—focusing on improved processes

Financial Restructuring—the objective is to improve the financial position of the company by restructuring the balance sheet, reduce the cost of funding, and enhancing liquidity by increasing the number of funding alternatives.

Key Analysis Tools:

Cash Flow Determination

  • 13-Week Cash Flow Model

Insolvency Prediction Determination

  • Altman Z-Score
  • Financial Ratio Analysis

Enterprise Market Determination

  • SWOT Analysis (Strength Weakness Opportunity Threat)
  • Porter’s Five Forces Analysis
  • Value Chain Analysis

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