The Anatomy of A Turnaround

ByKelly Deis

It is a chaotic time for management when their company is in the midst of a turnaround – fretting over revenue, placating investors, managing suppliers, reducing costs all while keeping employees motivated. There is an inordinate amount of things that need to get done. How do you know what to prioritize?

A disciplined process can help bring order out of chaos and lead to a successful turnaround. Of course, solid management, great employees, and accommodating suppliers and creditors also helps.

Step 1:  Project Your Cash Flow

Companies that are in a turnaround situation are generally cash-constrained. You’re stretching payables, calling customers to collect, testing the limits with your bank. You may have already asked investors for additional capital.

The first step to a successful turnaround is to develop a detailed cash flow projection. What are your receipts and when will they be coming in the door? What are your outflows, and when are they due? Are there quarterly or annual payments, such as insurance on the horizon?

The goal of Step 1 is to understand when you are going to hit the cash trough and to plan for it. Do you need to start having those difficult conversations with the bank and/or investors now? How much do you think your shortfall will be? Best to anticipate cash flow issues well in advance so there are no surprises.

Step 2:  Free Up Cash

Chances are that you are already working payables and receivables pretty aggressively. Where else can you free up cash? Is your inventory moving quickly enough? Is there obsolete product that can be liquidated? Do you have any non-operating assets that can be sold or space that can be sub-leased? Can payment terms be re-negotiated? Look at every line on your cash projection to see if there are opportunities to free up cash.

The goal of Step 2 is to minimize and delay the cash trough. The better the cash flow, the more time you have to fix the business and the more accommodating your investors/creditors will be.

Step 3:  Identify the Problem

Take a holistic look at what you do to identify where your business model is falling short. A quick and dirty benchmark study can be a good tool to point you in the right direction. A few questions to ask:

  • Are your products and services in-sync with the market?
  • Do you have adequate sales and distribution infrastructure?
  • Are your costs appropriate for your revenue?
  • Is management able to effectively execute?
  • Are your operations efficient and effective?

 

The goal of this step is to understand the underlying reason(s) why the company is struggling. Superficial cost reductions will help alleviate immediate cash flow constraints.  But, a sustainable turnaround will only come from a perfected business model.

Step 4:  Remediate

Now that you understand the underlying cause of your company’s difficulties, develop a strategy to remediate. It is at this point you need to make and follow through on some tough decisions. Crystalize the vision, set goals, develop a plan and execute. It takes hard work, a motivated team and some late nights.   Is it possible that you need to:

  • Overhaul your core offerings?
  • Create an incentive plan for your sales team?
  • Revamp your supply chain?
  • Reduce headcount?

 

Step 5:  Reforecast and Adjust

As you are working to resolve the underlying issues of the business, you also need to determine if all your great work is going to pay-off.  It is time to reforecast your P&L projections using revised assumptions based on your plans to remediate.

What are projected sales from new revenue streams?

  • What is the sales lift and costs for your new incentive plan?
  • Has changes to your supply chain improved gross margins?
  • What are your new SG&A expenses?

 

Will these changes result in a sustainable and profitable business? If yes, keep moving forward. If not, go back to Step 3 and continue to reevaluate the business model until it pencils out.

The 5 steps I have outlined are a general roadmap for companies in transition. Having a clear plan can help keep you and your team focused – even while being pulled in many different directions.