A company’s downward change of direction can occur at any time and can happen for many reasons – some are controllable – others are not. Internal causes can take their tolls, such as failure to deliver value to customers, mismanaging operating expenses, or outside influences such as pressure from competitors, economic downturns, or government directives.
It’s important to identify problems early and immediately take action to stop any negative impact and work on business turnaround solutions to bring the company back to profitability.
Chief executives and business owners must be alert to negative trends, admit there’s a problem, commit to taking the necessary actions, and work cooperatively on solutions.
Signs of Trouble
Several warning signs come up when companies are having problems. Most are detectable in financial statements and the typical analyses in financial reports. The best way to keep problems from getting out of hand is to have timely and accurate financial reports, accompanied by appropriate performance metrics like KPIs.
Some common indicators of evolving problems include:
- Decline in sales
- Increase in inventory stock
- Slowdown in collections from customers
- Swell in unpaid bills to vendors
- Expanding use of credit line from the bank
- Failure to meet covenants imposed by lenders
- Surge in complaints from customers
- Friction in relationships with suppliers
- Escalating employee turnover
While companies rely on revenue, collecting that revenue is essential as it’s the source of cash.
Increases in accounts payable translate into increased demands on future cash. If a company borrows more from the bank to maintain necessary cash levels, this is a sign that revenue is not keeping up with expenses. A surge of complaints from vendors about late payments and the exodus of employees can indicate operations aren’t being effectively managed.
Combating Negative Trends with Action
Companies experiencing a downturn need to be dealt with much differently than those that are on track or growing and require special treatment. The majority of companies in a decline benefit from obtaining advice and guidance from experts outside of the organization.
So, the first action should be hiring professional advisors and forming an advisory board to oversee the business turnaround. With an advisory board in place, senior executives or business owners will be more prepared to develop and execute a recovery plan.
Here are some of the actions for such a plan:
- Engage employees in the process and get their commitment
- Reorganize management structure and assign accountabilities
- Identify cash flow challenges, work to reduce expenses, improve collections, and negotiate payment terms with vendors
- Establish daily cash forecast reports, and monitor progress on a weekly basis
- Develop methods to recover financially, take actions to improve cash flow, and enable the company to move forward in its turnaround efforts with the help of an outside professional finance expert.
- Meet and collaborate with lenders, inform them of the situation, and provide them with the financial recovery plan.
Develop a new marketing plan, encompassing an in-depth review of the customer base, product demand, competition, etc. This is best accomplished with a highly-experienced, professional marketing executive.
These are all critical components to get the turnaround started. Transparency with employees, customers, suppliers, and lenders is essential. After all, it is in everyone’s best interest for the turnaround to succeed, and fostering cooperation can provide better results.
Forecasting Cash Flows to Survive During the Initial Stage of Actions
Preparing a financial recovery plan is the very first step to take for keeping the company moving forward. A top priority is determining how much cash is available and forecasting cash flows for at least the first thirteen weeks. Projections for cash coming in from sales, and estimates for the cash going out for all purposes, need to be done with a careful review of timing and amount. Projections should then be modified to be more aggressive in collections, to identify potential savings available from cost-cutting, and to negotiate deferral of cash payments through negotiations with vendors, whenever possible. Depending on how this forecast turns out, it may be necessary to approach the bank for temporary cash. If this is the case, a longer cash forecast schedule would need to be prepared, showing bank funds’ repayment.
A review of the balance sheet can help determine if funds can be raised by other means. If there are assets that can be used as security for a longer-term loan and/or more favorable finance fee, and cash flow can cover the finance cost, this could become a reasonable alternative and buy more time to get the recovery accomplished.
Considering all this, the numbers used in the financial recovery plan will include projected sales targets producing the potential for optimal profit margins down to the product level.
Determine Measures to Achieve Profitability
The financial recovery plan should also include the actions necessary to return to profitability. Some of the considerations in determining profitability are as follows:
- Identify the overall breakeven point
- Allocate overhead at the product level to eliminate products that are losing money
- Direct focus toward profitable products
- Apply “zero-based” budgeting to factor out non-contributory costs
Other budget-related considerations that need to be included that impact profitability include:
- Costs associated with professional turnaround service experts
- Capital expenditures that contribute to improved efficiency
- Marketing investments that contribute to increasing sales
- Finance charges to be based on the optimal financing alternatives
Additional Actions to Protect Profitability
The recovery plan also needs to include actions designed to protect profits and cashflows prospectively. Close attention needs to be given to the following areas:
- Aging of accounts receivable to assure improvement in customer collections
- Inventory levels to avoid carrying excess stock.
- Incentive programs with sales staff for bringing in profitable business
- Leverage position on the balance sheet to keep finance terms within guidelines
- Managing KPI’s to keep profitable trends in place
Elements for Consideration in the Recovery Marketing Plan
The revenue portion of the recovery plan will come from details in the marketing plan. Substantial research will be necessary for the market sector to determine the actions needed to ensure effective marketing campaigns going forward. Some of the analysis considerations would be:
- Customer demographics, psychographics, and audience insights
- Customer sentiments and feedback
- Competitive advantages and product demand
- Competition and market share
- Product pricing and profitability
- Composition of the sales force and compensation structure
Can the Business Be Turned Around?
If the problems are identified on a timely basis, and professional expertise is retained, there may be a solid chance the company can survive. That said, a lot can depend on what caused the problems in the first place. This assessment should not be too difficult to make.
If cash flows can’t be restored on a timely basis, other actions may be necessary to keep the company going. This could include selling non-essential assets that have value or filing for Chapter 11 bankruptcy protection, allowing the company to continue operating while negotiating debt reductions with creditors.
Other options may apply if the company can’t be turned around but has potential value to a competitor or other related business in the market niche. Depending on the situation, it could make sense to sell the company or merge it with another business. On the other hand, if there are no interested buyers, a liquidation may become the only remaining course of action.
The best way to avoid the need for a business turnaround is to have timely, accurate, and relevant financial reports and analyses and paying close attention to what they show. Reacting to trends as quickly as possible can avoid a crisis. If a crisis appears inevitable, professional advisors should be brought in immediately to help assess and remedy the situation. Advisors that are typically helpful in a turnaround situation are finance specialists, marketing specialists, accountants, attorneys, and bankers.
When notifying a bank or other lender about problems impacting the business’s finances, it is important to be timely and direct and have a recovery plan—the more time given to employing a solution, the better chance that the actions will be successful.
Due to the complexity of the process and the importance of managing multiple action plans, it is very wise to utilize highly-experienced professional consultants and advisors for their expertise. The investment made in the services provided by outside consultants can be very rewarding in terms of the greater value they can help the company realize.
Copyright © 2020 by Eugene J Gross, CPA