Tag Archives: Management

Preparing to Implement a Turnaround Plan

As mentioned in yesterday’s post, recognizing that you have reached a point where a turnaround is necessary is critical to getting the most out of the effort to reposition the company. By holding out for a better day, the executive team simply prolongs the agony as the business continues to deteriorate. An inability to assess the situation accurately can render the team “unhelpable.” Lifeguards are instructed not to try to rescue a drowning man who is still flailing about in the water and attempting to save himself. Likewise, a savvy turnaround artist will not step into a company until he or she is assured that the executive team is convinced of the trouble and unable to get out of it without outside help. More importantly, the team must want to be helped and willing to accept help. Further, the business must be capable of being saved, and the team must have the ability to make the necessary changes.

Bringing in Help

Unfortunately, the warnings of bankers, attorneys, creditors and accountants are too often ignored. With bankruptcy lurking around the corner, however, the team may finally concede and call in a competent adviser–a strategic thinker with experience in assisting companies survive and prosper. In addition to possessing the right mindset and skills, the adviser can provide needed credibility so vital to stakeholders’ acceptance of the turnaround plan. 

Anyone brought into the company will need the full cooperation–and honesty–of management and key staff during the recovery. Efforts to paint too rosy a picture of the situation will undermine the adviser’s ability to turn the business around. For example, hoping that an industry networking event will suddenly generate enough new prospects to overcome a current cash crisis is another form of avoiding the real issues. Similarly, increasing the stream of revenues alone may make the company appear more profitable for a season, but only internal changes can prepare one to withstand business cycles. An effective turnaround adviser can help create and implement these changes.

Implementing the Turnaround Plan

While decline must be reversed quickly to create the positive cash flow needed to fund operations, turnarounds cannot be accomplished overnight; it took a while to get here, and will take a while to get out. Six months of intensive restructuring is usually necessary to return the business to positive cash flow. A complete turnaround can be accomplished within eighteen months if all goes according to plan.

Gathering Information

Having decided to begin the process of turning the business around, the executive team should be prepared to gather extensive information for analysis. After analysis, meaningful tactical and strategic plans will be developed for immediate implementation. Be careful not to confuse tactics and strategies. Tactics are methods employed in the short-term (six months or less) to reverse decline; they are specifically targeted at crisis-oriented problems. Strategies, on the other hand, are longer in time and scope. Strategies are aimed towards growth goals and objectives.

A turnaround plan is gleaned from information gathered in the financial, marketing, and operations fact-finding process. Like every good plan, it has four main purposes:

  • to provide a standard reference for organizational focus
  • to establish priorities for allocation of capital resources and management effort
  • to identify and quantify objectives (one to three year focus) to encourage and monitor performance
  • to set timetables and goals (three to five year horizon) for achieving objectives

There are two primary areas of information to be gathered for planning and analysis in a turnaround: the internal and the external environments.

Crafting a Turnaround Plan

The turnaround plan for a company in decline is like a recipe to a cook. The effective restructuring of a business requires the preparation and implementation of a viable plan. The plan must be based information gathered from financial, operating and marketing sources. Good plans must also address cost containment and revenue enhancement, providing the executive team with a step-by-step process for reversing decline and stabilizing the business. It must also lead to orderly growth promoted through a flexible strategic plan.

In turnaround planning, objectives are created that can be accomplished quickly. Therefore, a turnaround plan should be direct, with a limited life not to exceed one year. Teams should initiate tactics (for example, increasing traffic to one’s website) on a weekly basis, then shift to biweekly and monthly to keep pace with the rate of change within the business. When objectives must be accomplished over a longer time span, it is time to prepare a flexible strategic plan.

The Purpose of a Turnaround Plan

The purpose of a turnaround plan is to provide an organizational focus and a timetable for all recovery activities. For example, measurable performance standards must be enforced. Therefore, key personnel should set objectives before the actual plan is drafted to encourage employees to commit to levels of performance that they believe are attainable. The team management approach will generate the ideal environment for enforcing the mandates of the plan, since every key employee will have been involved in its formulation and implementation.

Time and Money

Because turnarounds are time and dollar critical, the team should stick to the originally drafted plan as long as its underlying assumptions remain valid. When the parameters upon which the plan has been based change, it is time to modify all portions of the plan affected. However, the team should not abandon the plan upon first confrontation with undesirable results.

Outside Parties

To satisfy outside parties interested in the cause for company decline and the solutions underway to reverse it, the plan typically contains a brief section describing the background and historical evolution of the company. Additionally, some discussion of prior operating performance and an objective assessment of the current condition can help the team highlight the events that have caused the problems. Management should then state the problems that caused the decline and follow up with the solutions that have been implemented to address it. Sections on the vision and philosophy of the company are unnecessary, though some do outline the thought process that led to current strategies and goals. However, these thoughts may be more appropriate in a flexible strategic plan, since a turnaround plan is action oriented.

Reaching Ground Zero

In environments in which the business has always made money (and may still be making marginal, though unsatisfactory, returns), it may be difficult to deal with declining profitability. Reading financial reports that signal what may be the first downturn the company has suffered is not sufficient preparation for the struggles to come.  Some find it difficult to believe that what they are reading is accurate. The impulse to ignore the signals and hope that the situation improves can be overwhelming. At some point, however, the team must deal with the facts and acknowledge that money is being lost–either as a net loss or as a smaller return–and that radical change is needed.

Being brutally honest and objective about the status of the business is hard. But, if “ground zero” is never reached, recovery cannot begin in earnest.

Growth, Decline & Stabilization Via Turnaround

Clearly, many of the signals of company decline are a result of the growth a company may have experienced. When the growth ends and the business enters a period of stability, management may find itself unable to cope with the lack of growth. The team may continue to manage as if the rate of growth will continue in the near future. However, the plans for an expanding business differ markedly from those of a stable or declining one. When plans are not modified to address the new situation, companies often court trouble. A plan that is carved in granite will become part of the problem, rather than part of the solution.

Case Study: Be Tall Houses

be Tall Houses is an example of a company that has internal and external problems. Be Tall was building forty single-family homes in the $100,000-$150,000 price bracket annually. Sales stood at $4.5 million, and the company employed nine employees.  Internally, there were excessive layers of management, excess wages, material waste, cost overruns, employee morale problems, and information flow deficiencies. In short, the company had almost every signal of decline. Externally, new competition had entered the market. Since Be Tall had damaged its relationships with material suppliers, it could not receive the necessary materials to compete.

The company is now undergoing a turnaround. Part of the strategy is to reduce costs and payroll by a minimum of $250,000 per year. There is also a slump in Be Tall’s markets, so revenue has slipped. The internal elements were changed by laying off unnecessary supervisors, reducing wages, adding a profit-sharing plan, settling lawsuits with suppliers and resuming business on account, reducing costs, and adding computerized information systems to prevent selling homes below cost. External elements are being addressed by rebuilding relationships with suppliers and banks. Finally, Be Tall Houses’ image is being restored in the mind of new home buyers. For example:

  • low offers are being refused,
  • real estate agents are advised that the builder is doing fine, 
  • the builder’s presence in the local community has been heightened, and
  • the builder now meets personally with each buyer.

A building company–or any other company–that suffers from problems and decreased volume becomes a part of the industry and/or community “rumor mill.” Stakeholders–anyone who has an economic interest in the business–may begin to discuss the company’s demise before the business feels the impact of declining profitability. Customers may begin to complain about service. Small problems may take on monumental proportions.

Be hesitant to respond to rumors. Telling stakeholders optimistic stories only makes the situation worse when the stories never come true. A company in trouble needs to face its problems and seek advice on how to solve them. By managing the rumormongers part of the solution, rather than part of the problem, the top executive can begin to clear an effective path toward increased profitability.

Stabilization

Once the signals of a declining business are recognized, the hemorrhaging must be stopped. it is imperative that the company determine its future direction immediately. Faced with an enterprise that has suffered deteriorating value, direct and specific actions must be undertaken by the executive team to reverse the downward spiral. Clearly, changes need to be made; the question now becomes: how should this change be implemented?

The Turnaround: Three Methods

The methods employed in a turnaround vary from case to case but can generally be classified as strategic, operational, or financial (or some combination of the three): Strategic is a changing of markets and products. Operational is an emphasis on cost reductions, revenue generation, and asset reduction. Financial is a restructuring of the balance sheet and income statements to generate cash to fund business growth or reorganization.

 

Common Danger Signals of Company Decline

Previously, we have examined the internal and external elements of decline and some of the early warning signals of each. Notably, we have made the distinction that, while internal elements are easier to control, external elements are capable of being influenced as well. It is the responsibility of the executive team to coordinate marketing and sales, operations and finance in such a way as to anticipate changes in the environment and plan accordingly.

The clear danger signals of decline vary with the stages of decline, and become more serious as the decline intensifies. Some of the common danger signals are as follows:

Common Danger Signals

Early Decline:

  • shortage of cash
  • strained liquidity
  • reduced working capital
  • stretched accounts payable
  • late accounts receivable
  • reduction of return-on-investment (ROI) by 20-30 percent
  • flat sales
  • several quarters of losses
  • increased employee absenteeism
  • increased employee accidents
  • increased customer complaints (product quality, delivery)
  • late financial and management information

Mid-Term Decline:

  • increasing inventory
  • decreasing sales
  • decreasing margins
  • increased expenses
  • increased advances from banks
  • requests for additional considerations from banks
  • late and unreliable financial and management information
  • erosion of customer confidence
  • accelerated accounts payable from vendors
  • overdrafts at the bank
  • delayed accounts receivable from opportunistic customers
  • violation of loan covenants
  • bank used to cover payroll
  • increased interest rates on indebtedness from banks due to increased perception of risk

Late Decline:

  • little attention  paid to profit decrease
  • staff cutbacks without analyzing cause of problems
  • overdrawn bank accounts as substitute for line of credit
  • cash crisis
  • accounts payable 60-90 days late
  • accounts receivable 90+ days late
  • further decline in sales
  • extremely low employee morale
  • eroding company credibility
  • excessive decreased inventory turnover
  • supplier restrictions
  • fewer reports to bank
  • qualified opinion from auditor
  • bounced checks
  • cutoff on supplies
  • credit offsets
  • accounts receivable continuing to age
  • further decrease in margins
  • further decrease in volume of sales
  • increase in uncollectible receivables
  • no liquidity
  • depleted working capital
  • lack of funds for payroll
  • ineffective management
  • attempts to convince creditors that company is viable and that liquidation is not necessary

Signals That Can Occur At Any Stage:

  • decreased capital utilization
  • decreased market share in key product line(s)
  • increased overhead costs
  • increased management and employee turnover
  • salaries/benefits growing faster than productivity/profits
  • increased management layers
  • lost market share to competition, which is not keeping up with marketplace changes
  • management in conflict with corporate goals and objectives
  • opposing directions for company and management
  • sales forecasts that predict that company can sell its way out of difficulty
  • poor internal accounting
  • credit advances to customers who do not pay on time
  • non-seasonal borrowing
  • sudden overdrafts
  • increased trade credit inquiries (a signal that new vendors are being sought out)

Not all of these symptoms may appear; it is sufficient cause for self-examination if some of them occur. As the problems of the business increase, its reputation with suppliers, banks, current customers, and other stakeholders is severely diminished. A credibility gap may occur, placing the business in the position of having to defend itself not just from internal and external factors, but also from a loss of esteem in the business community. Credibility is a key factor to the success of a business. Just as a company’s credibility within the commercial and banking community can ensure its success, a lack of credibility can just as surely cause its demise.

 

(Internal) Early Warning Signals of Decline

As ominous as uncontrollable external elements may appear, they are not the major cause of business failure. Rather, controllable internal elements are most frequently the problem. The internal elements that affect businesses are finance, operations, and marketing and sales. These are the basic functions over which a company’s executive team exercises direct control. Any business function can be placed within these categories. 

Business management is the force that drives these functions; yet changes in internal elements are at the root of the majority of business failures. These failures do not occur overnight; rather, such business decline usually occurs in stages. Extensive research that the founder of our organization performed suggests that the basic reason companies fail to recognize the onset of decline is simple management myopia or ignorance.

When your team fails to recognize the internal signals of decline, rationalization often ensues, with blame attributed to uncontrollable external elements. This approach appears on the surface to absolve management of responsibility for the company’s problems. For example, a shortage of cash might be blamed on stricter banking standards or lack of demand for the product/service. This “problem” can then be attributed to the nation’s economy.

Management can then take smaller “leaps of logic” to shift the blame to increased competition, which has made the marketplace unpredictable. While a shortage of cash is a symptom of a problem and surely a major signal of decline, the shortage of cash itself is not the actual problem; the problem may be buried deep within the business’s management and accounting information systems. You may be making sales at a price that does not cover the fixed costs of operations, or accounting personnel may not have developed contribution margin, product cost, and direct cost of sales standards. If your “system” cannot measure the causes of unprofitability, how do you know what changes to make?

As with external elements, internal elements can also interact with one another. Finance, operations, and marketing and sale shave a natural interaction with each other and are, in fact, related to one another. any one of these internal elements may cause decline. As the problem persists, the other functions become involved. Operations techniques may become antiquated. Marketing and sales can be in the wrong market with the wrong product. Finance may be unaware of other departments’ changing financial requirements. Such a lack of information flow between departments also signals decline. Businesses cannot survive without information about both internal and external environments.

Coping With Internal Elements

It is unfortunate when managerial tools are not used for maximum benefit. Many companies fail to manage by cash projections; instead they rely on “looking backward” statements like balance sheets and P&L. Budgets comparing projections to performance are critical to effective management. When budgets are tasks rather than tools, your management is weak. Balance sheets can show working capital reserves even when a company is in decline. Changes in accounts is important to track–it can point you to root causes and symptoms of real problems.

Controlling Internal Elements

The internal elements are the factors that should be most familiar to executive teams, but they are often the most overlooked. The very nature of the internal elements is dynamic; they are continually evolving and require constant monitoring. Since managers may be unable to understand the dynamic nature of the internal elements, a decline may go unnoticed for a while. Management’s primary role is to use these elements to maximize profits. Controlling finance, marketing, and operations requires monitoring of all the functions to identify potential signals of decline.