First published on 14 November 2011 by Tony Groom
There are essentially three phases to a business turnaround which are the first, emergency phase to try to ensure survival, followed by a stabilisation phase which includes a thorough look at any fundamental changes needed to achieve a viable business and finally the growth phase to secure its future on solid foundations.
It is important that the main objectives of each phase are achieved before going on to the next one. This needs a clear understanding from all those involved of the objectives of each phase. The focus of activity changes throughout the process from hoarding cash, terminating contracts and limits on spending while trying to survive in the emergency phase is very different to funding marketing activities, new processes, training and other efficiency related initiatives during a stabilisation phase.
The turnaround process differs from the insolvency process in that the aim of turnaround is to achieve a viable company that can survive whereas insolvency is aimed at putting a business in the best shape to sell the assets and liquidate the company.
The first phase can be likened to triage and is similar to the actions usually carried out by a paramedic at the site of a traffic accident. The paramedic’s job is to stabilise the situation so that the injured can be moved to the surgeon (if needed) who would carry out the second phase of dealing with the damage.
So phase 1 of a turnaround is about arresting decline and saving the business. It requires decisions to optimise survival and a total focus on becoming cash positive as quickly as possible by only paying essential suppliers and liabilities.
It is much easier to do this with the help of a turnaround adviser who can take an objective look at the business, and help strip it down to the essentials to achieve what in essence is a viable business, one that is cash flow positive and profitable.
Once the adviser has had a detailed look at the accounts and the business operation to establish the essentials they can then also put together a proposal for ensuring that there is sufficient cash flow to deal with the immediate situation in a way that will allow the business to continue trading while a strategy is being prepared for the next phase.
It will depend on the state of each individual business what the adviser will suggest to stabilise the situation but there are a number of tools that can be used.
However, it is likely that they will identify and prioritise those suppliers and liabilities that are key to put the company on a more secure footing so that it can continue to function.
For example, a company uses materials critical to its production and imported from China, but they are held up at the docks because it has been paying other bills rather than paying the freight forwarder, so in order to survive by having stock, paying the freight forwarder’s bill has to be a top priority.
In another illustration a company with a turnover of £2 million had integrated enterprise management software using a beast of an IT system. The IT was built around a huge printer that did everything and was linked to the bespoke software that integrated operations, accounts, quoting and customer management. The reports when everyone used it were excellent but the whole system needed very expensive hardware, software and maintenance that cost £15,000 a month, about 10% of turnover.
The rescue adviser’s conclusion was that the monthly bill for all this was dragging the company down and proposed replacing the sophisticated system with a simple accounting package for three users and basic stand alone hardware: two printers, a fax and a copier. The original server was retained. While it initially meant spending a little money to buy the equipment, the saving of £15,000 a month put the company in a much stronger operating position.
A rescue adviser works as part of the company’s team and even if some of the proposed “medicine” seems unpalatable it is worth keeping in mind at all times that their interest is in helping you to survive and that the big advantage to you is that they are able to bring a new and more dispassionate eye to problems within the company to which you may be too close to be able to identify.