The 3 Stages Of Business Turnaround Management
I’ve helped steer dozens of troubled companies back from the brink over the years, and the only thing certain when it comes to how owners and managers respond to this crisis is how widely the responses will vary! If you need a Turnaround Management refresher, have a read here.
When a company is threatened with insolvency due to poor cash flow, the key decision-makers, in their distressed state, have mindsets that vary from denial and blame, to “head in the sand” optimism that the market will pick up and the problem will go away.
The sensible ones realise they need expert help, and seek assistance.
The first place many turn to is their bookkeeper, accountant, or advisors, but they are often limited in providing solutions and only tell you what the numbers say. This process can consume valuable time when the business is exposed to accelerating decline, insolvency, or in the worse case inaction leading to liquidation or bankruptcy.
A more effective solution is to engage a turnaround management specialist, as early intervention increases survival potential. By the time the turnaround specialist is engaged, the matter is usually time-critical. For some effective corporate turnaround strategies, have a read here.
So, what is turnaround management and how does it work?
3 Stages of Turnaround Management
Stage 1 – Assess Viability
This consists of a high level and detailed investigation of the business and its situation, and can take 2-4 weeks.
The investigation acquires a wide range of information including:
- Current and historical financials (P&L, balance sheet, cash flow and verification these are reliable including costing systems)
- Stakeholders and debtors
- Management capability
- Cause of situation
- Potential solutions
- Assess if business issues are controllable
- Assess if ongoing business is viable
- Develop SWOT analysis to provide clarity on options.
This is summarised to provide decision-makers with a concise assessment, including options, risks and priorities to consider in implementing a turnaround.
With current legislation in most countries, the directors have to make the decision on what to do with this information. The turnaround specialist’s role is to provide the advice and likely scenarios with the issues.
Stage 2 – Stabilise and Develop Strategy
Once the issues and priorities have been identified and agreed to, Stage 2 focuses on stabilising the business and planning the recovery strategy. The timeframe can vary widely depending on the business situation and complexity and can take from 4 weeks to 3 months. In many cases the foundations of Stage 2 are being formed through the Stage 1 discovery.
The turnaround strategy consists of the following, and may occur concurrently and in any order:
- Crisis stabilisation – taking control, cash management, short term financing, first step cost reduction.
- New or improved leadership – due to inadequate skills, instability in management, need for fresh ideas, or to bolster a tired team.
- Stakeholder focus – advising and engaging stakeholders dependent on the outcome and includes financiers, creditors, employees, customers, industry associations and even government officers (sometimes a source for grants). The benefit of this aspect is often underestimated and often provides the greatest source of solutions and support.
- Strategic focus – redefining the core business, restructuring, M&A, divestment.
- Organisational change – engaging key staff, improving communication, improving morale.
- Process improvements – operational improvements that provides low hanging fruit, and focus on key issues that may be key risks.
- Financial restructuring – implementing tighter control and monitoring of cash (implementing a rolling 13 week cash flow forecast), equity injection, asset reduction or selling under-utilised assets to generate cash or use as security for short term funding.
Stage 3 – Implementation and Monitoring
Once Stage 2 is underway, the focus will be the detailed implementation and monitoring.
This may include setting up an advisory board to assist the owners, directors, or board to maintain focus on the implementation.
The business may bring on board a Chief Restructuring Officer whose prime role is to implement the turnaround strategy – this allows management to maintain focus on their core skills.
Stage 3 can over lap stage 2, and can vary from 3 – 12 months.
For more information on turnaround, listen to our podcast on this website.
The next update will expand on the Chief Restructuring Officer role, how it works and the benefits.
Keith Bailey was a former client director at Vantage Performance, specialising in assisting under-performing businesses and providing support and resources for recovery, rapid growth or challenging situations. Vantage Performance is a member of the Turnaround Management Association Australia and was awarded the 2008 and 2009 “Turnaround of the Year” awards.