Business Turnaround: A Brief Introduction

Any business during its lifetime can suffer from issues of under-performance and financial distress. Usually, businesses do not die with a bang but it is usually a slow and painful downward spiral. The reasons can be simple or complex. It can be a descent into debt, cash flow problems, dwindling market share, overstocked inventories or inefficient management structures. These are just a few examples of the scenarios that can arise.

Problem Phases

There is usually a time lag between when the problem becomes apparent to the business owner before it becomes apparent to the world. There are usually 3 phases in the decline of a business.
Phase 1 –The problems or issues facing the business are only visible from within the business. In other words, they are visible only to the owner, the management and the workforce
Phase 2 –The issues begin to be noticed by the outside world.
Phase 3- The issues are well-known to the outside world.

It is in the best interests of the business that corrective action or steps be taken well before phase 3 occurs. Taking corrective action after phase 3 can become very complex because, at phase 3, the creditors will know about the problems, and they will start taking action against the business. It can be difficult to concentrate on coming up with a workable strategy while fending off pressure from creditors and bankers. Some of the creditors may even seek professional help in order to accelerate the recovery of the amounts owed by the business. There will be very little scope to address problems without recourse to insolvency legislation. Of course, this will depend on the jurisdiction the business will be operating in.

There are times when entrepreneurs may delay taking corrective action because they will be in denial mode. You must admit and acknowledge that there is a problem. Some entrepreneurs will choose to continue walking in a fog of denial and this makes a bad situation far much worse. You cannot seek or implement solutions if do not admit there a problem. You must honestly zero in on the business’s situation without making any excuses. As a business owner, you must not have perceptions that are chiefly ego driven. You may have always seen yourself as a winner and high achiever, but there are times when the wheels just come off and you need to revise your strategy or business model.

Turnaround Prerequisites

Turnaround management involves formulating a strategy to turn a struggling business back to profitability. It is a collaborative process which can be led by the business owner or an experienced turnaround consultant. For a turnaround strategy to have any chance of success, the following three aspects must be present in a business.

(i)A viable core business
(ii)Financial resources that are both adequate and available
(iii)Adequate organisational resources.

If a business has all three, then there is probably something to save but if it does not, then the cruel fact is that a voluntary administration or liquidation may be the way to go.

Turnaround Process

A turnaround strategy will more or less involve the following steps.
(i) Understanding the depth and magnitude of the problem. Without the correct diagnosis, you will come up with the wrong solutions and this will make the situation much worse. The most common mistake is where entrepreneurs just rush to cut costs or reduce the workforce without really understanding the situation. Such moves can actually lower the quality of the products or service and this will actually worsen the situation.
(ii) Stabilising the position by engaging the senior team and the workforce in order to inculcate a positive mind-set and togetherness throughout. This will be vital for the business to get through the fragile situation.
(iii) Providing a route map to recovery
(iv) Implementation and monitoring.

Communication is the thread that will cut through all the four stages above. Communication is vital in business and even more so in a crisis situation. It has to be well-crafted so as not to cause panic and despondency. You will also need to communicate honestly with creditors and financiers.

Possible Measures

The turnaround plan may include measures such as

• Changing the management team and structure
• Review quality of brand proposition and delivery
• Establishing strategic alliances e.g. giving consignment stock to businesses who sell complementary products.
• Identifying quick cash flow boosts e.g. establish whether there are any new products or services that your existing customers could buy from you.
• More rigorous debt collection.
• Restructuring and rescheduling of debt. This will involve negotiation with financiers.
• Sales discounts for slow-moving stock.
• Shutting down unprofitable business units.
• Reviewing and redesigning of the business model.
• Diversification of products or markets. This must however be based on thorough research and organisational capability otherwise you will create even more problems.
• Changing distribution channels.
• Stopping unprofitable lines or products.
• Review of product market match
• Stopping unnecessary capital expenditure.
• Identifying excess or idle assets which can be disposed of to boost cash flow.

All the measures mentioned above can fall into three 3 main categories which have to do with
(i)People- has the business got the right people in the right places?
(ii)Processes-are the people doing the right things at the right time. Is every process or procedure adding value or destroying it?
(iii) Finance-How is the business’s cash flow being managed?

As an entrepreneur, if you feel that you do not possess the skills or experience necessary to bring about the required corrective change, you can engage a turnaround expert. The choice of which turnaround expert to pick will depend mostly on their track record of success and relevant experience.

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