- Juanita Schwartzkopf
How to Spot the Signs Turnaround Management Can Help a Business
When a business owner hears the term “Turnaround Management” from its lender, the immediate reaction often focuses on being upset that there is the implication that a turnaround is needed. This reaction puts a healthy relationship with turnaround management experts at risk from the start.
If the business owner would instead take the approach that there are always ways to improve, and turnaround professionals have a unique way of quickly analyzing a business and identifying discussion topics and recommendations that will improve the overall performance of any business, the use of a turnaround professional could be a valuable process for any business.
Challenging current management strategies and analyzing financial, operating and sales performance is a healthy business checkup for every business.
Turnaround management is a critical part of any business management, forecasting and planning project. But, turnaround management is particularly important when the business is facing financial difficulties or other major obstacles. Identifying when a business needs turnaround management is crucial to ensure issues can be addressed quickly and effectively.
Here are some key signs that a business may need turnaround management:
Falling Sales: Declining sales are key indicator of potential problems. Understanding the competitive environment for the business and the pressures competitors are experiencing is critical. For example, when a competitor is failing, it may drive product prices down as the competitor attempts to keep its sales volume intact. With the current levels of inflation evaluating price / volume changes period to period could help focus attention on problems a business is experiencing.
Falling Profits: If profits are decreasing in dollars or as a percent of sales, taking a hard look at financial performance analysis could be key to future success. It is easy to fall into the excuses of the day – labor costs, supply chain issues, inflation, etc. A business needs to manage through these impacts rather than be hostage to them.
Increasing Working Capital Needs / Operating Cycle Creep: Evaluating accounts receivable, inventory and accounts payable levels in relation to sales is a key indicator of performance risk. When evaluating inventory, for example, looking at price and volume is important, as is turnover by SKU. Evaluating concentrations in accounts receivable and changing levels is key. Identifying the critical suppliers and looking at their price and volume changes will be helpful. Overall, the operating cycle of the business identifies the amount of cash a business needs to operate. Adding the days sales in accounts receivable and days sales in inventory, and then subtracting the days sales in accounts payable, tells a business how many days sales of cash need to be on hand. Tracking that need identifies potential cash flow issues and creeping cash needs.
Debt and Leverage Increases: The amount of short term and long-term debt a business carries is a key indicator of potential stress. When debt is stable during a rising rate environment, cash flow can change from positive to negative. But, when debt is increasing during a rising rate environment, the company is at risk of running out of cash if any operational or sales hiccups occur.
Missing an Established Forecast: When a business is continuously missing its forecast, management needs to reevaluate the forecast and recast performance with the most current data. In the process of evaluating the forecast, it is critical to reevaluate how the original forecast was developed. That analysis can help identify the problem areas the business is experiencing.
Lack of Budgeting and Forecasting: Many businesses operate without a budget or a forecast. That is a high-risk indicator. That means performance is not evaluated in real time and the company does not have a written plan to succeed.
Old Systems or Procedures: The increased use of technology helps businesses better manage working capital and evaluate financial performance. Using old or outdated processes is an indicator of potential problems.
If a business is experiencing any of these issues, considering involving a turnaround professional would result in a faster evaluation and performance improvement plan. If the lender is seeing these trends, the business should anticipate the lender will request some additional outside assistance from a turnaround professional.
By acknowledging the signs listed above, companies can act now to start to turn the situation around. Turnaround management can be a difficult process, but it is essential if a business is to survive and succeed. If a business is seeing any of the signs above, it is time to take action and start looking at turnaround management options.
Once you've identified turnaround management as the best option for you, here is more information on what the process looks like and best practices to ensure success:
-How to Transform Your Business Using a Turnaround Management Professional
-What Techniques Will Help Companies Make The Best Use of a Financial Advisor?