In today’s economic environment no business is immune to the performance impacts of the past three years. The current combination of inflation, changing consumer demand, and opened supply chains, coupled with the remaining impacts caused by the supply chain disruption and the remote work structural impacts have combined in difficult to anticipate ways.
No business is immune to the challenges of remaining competitive in a rapidly changing economy, but 2023 is going to be an unprecedented period of change for businesses. From decreased customer demand to declining profits to customer service issues, businesses are finding themselves in a difficult position with no easy solution in sight. Fortunately, there is an often-overlooked solution in the form of turnaround management.
What is turnaround management?
Turnaround management is a specific set of strategies and practices that are used to transform a struggling business into a profitable and successful one. This process involves identifying and addressing the business’s weaknesses, as well as developing a plan to maximize the strengths of the business. By utilizing the skills of turnaround management professionals, businesses can use their resources more effectively and increase their profitability.
Analysis Comes First
The business undergoing this analysis and planning should establish a Turnaround Team, including key internal parties and turnaround professionals. While the internal parties know the details of the company’s performance, a turnaround professional has been through this process many times and brings additional insight and analysis skills to the team.
One of the first steps in the process of turnaround management is the assessment of the current business situation – often reviewed to as a Situation Analysis. This process typically takes three to four weeks and results in a clear understanding of the current situation, allowing all stake holders to have the same data points in front of them when determining how to solve the problems.
A Situation Analysis involves analyzing the business’s financial performance. This begins with year-end financial statements from 2019 to 2022, as well as inhouse interim monthly statements for the past 13 months. When preparing an analysis in 2023, it is important to begin the financial analysis with the last prepandemic year – 2019, and it is critical to evaluate the impacts of various government programs such as the PPP program and the ERC credits from 2020 to 2022.
Customer and vendor analysis is also required. Contract analysis is key to evaluating price changes that have occurred and opportunities for additional price changes. The analysis will need to use the customer and supplier base of the company, and outline the contracts with those parties.
Customer and product line profitability analysis needs to be reviewed or prepared. The company needs to know which of its products, product lines, and customers are profitable. In addition, if products are manufactured at more than one location, profitability by location will also be a key analytic.
Moving past financial analysis, KPIs and other operations related data is used to identify areas of potential improvement from an operations and inventory management perspective. For example, if product yield from raw material inputs is highly variable, additional information and research will be needed in that area. Or, if overtime is occurring on a regular basis, additional analysis will be necessary for the payroll and benefits expense line items.
During this analysis the focus is on cash flow and working capital management. Accounts receivable, inventory and accounts payable data for the most recent 13 month period, with cash balances and line and loan balances, helps to complete a picture of the cash flow of the business. While financial statements provide insight and consistent historical data, without an understanding of how cash moves through the business, the cash flow needs may be missed or understated. This cash flow and working capital analysis moves past financial statement preparation to actual cash needs. For example, taxes and insurance may be accrued monthly but paid on a different cycle. If taxes are paid in a lump sum annually, that cash outflow needs to be built into the cash flow. If insurance premium financing is used, the down payment and monthly payments for the annual premium financing schedule need to be built in.
Next, Develop a Plan
After this assessment is complete, the Turnaround Management Team should develop a plan to address the identified issues and put in place strategies for short term and long-term success. Recommendations and plans would include immediate actions (within 30 days), short term actions (within 90 to 120 days), and long-term actions. And, all actions require monitoring of performance to the turnaround plan.
In developing the turnaround plan, areas that may be considered include:
restructuring the organizational structure and staffing,
improving the speed and accuracy of financial reporting,
implementing a weekly cash flow and borrowing base reporting structure,
developing KPIs,
setting plans to increase efficiency,
diversifying products and services,
changing vendors,
changing customers,
supplementing staff where needed,
developing measurements of sales, financial and operating improvements to plan,
implementing a budget and considering a long-term strategic plan.
The list above contains just some of the many areas the Turnaround Team will address. Find an overview of FMG's expertise in those areas by clicking here.
Once the strategy is in place, the Turnaround Team = will develop an implementation plan to ensure the successful execution of the strategy. This includes identifying and hiring the right people, developing the right processes, and creating and monitoring metrics to measure progress. The implementation plan should also include a timeline for achieving goals and milestones. Typically, a Gantt chart or other timeline tracking tool is used for the immediate, short term and longer team plans.
Now Monitor, Evaluate and Adapt
Finally, the Turnaround Team needs to monitor and evaluate the progress to the plan and make any necessary adjustments in real time. Initially the Turnaround Team will need to meet weekly to evaluate cash flow, KPIs and strategy metrics. If necessary, the plan can be adjusted quickly by using this weekly monitoring approach.
In closing
Turnaround management can be a powerful tool for revitalizing a struggling business. By utilizing the skills and strategies of turnaround management professionals, businesses can maximize their strengths and identify and address weaknesses. Through careful planning, optimization, and monitoring, businesses can transform their organization and set themselves up for long-term success. Using a turnaround professional to augment the company’s turnaround team is a key to identifying the successful plan.
Do you have a certain industry you might consider a turnaround professional for? Here's a list of FMG's vast industry experience.