How to Turnaround a Crisis in Your Business
Turnaround Background
Crisis Defined: A crisis, as we define it, is a situation that severely threatens a company’s future existence and where the time horizon for decision and action is short. Many times the symptoms of a crisis, although longer in the making, seem to sneak up and reveal itself as a slowly declining bank balance, creditor repayment prioritization discussions, concerns about making payroll, rethinking staffing levels, postponing investment and so on.
Crisis Stages: The crisis stages are 1) the Relevancy Crisis, where changes in the market have impacted the company’s ability to maintain margins, which leads to 2) a Cash Crisis that impacts today’s free cash flow and cap-ex investment for tomorrow, followed by 3) a Liquidity Crisis impacting ability to pay bills, and ultimately ending with 4) the company facing Insolvency.
Turnaround Stages: A typical turnaround program includes diagnostic review and analysis, emergency, crisis stabilization and turnaround and growth stages. Rule of thumb is that the diagnostic and emergency activities take on average about 3 months, with the stabilization and turnaround activities taking from 6 months to 2 years or even longer.
Personal Impact: Small business owners whose livelihood is impacted by the crisis may also have personal guarantees in the business, which can compound the stress and make this an extremely emotionally difficult time. Running the business, fixing its current crisis, keeping the home fires burning while maintaining your health and wits about you can be challenging. Relief can come in the form of a solid fact-based plan. Here are some steps to follow while you re-invoke your passion for the business you love and get it back on track.
Beginning your Turnaround
The Focus: In the beginning the only priority is survival. At this point the strategy is to make deliberate change that results in immediate financial gain. Plan A (there is no Plan B) is to implement the things that support the strategy. The first thing to determine is if the company has enough cash on-hand to provide the time needed to get through the time period required to complete the diagnostic review and make the early changes. Remember – without a short-term there is no long-term, so at this point, besides cash nothing else matters. We recommend the following non-linear and iterative stabilization approach:
Crisis Program Management: RKH recommends a 100-day stabilization plan focused on generating cash and rebuilding stakeholder confidence. Program steps include Getting control. Get sole control of the chequebook, limit the spending authority of others, put in spending controls, beef up reporting and include solid project management disciplines. Determine the issues that are the biggest threat and immediately dampen their impact. Ask “Which of these issues we are facing are fatal?”
Getting the real financial picture: Unfortunately, the situation is probably worse than it looks on the surface so the first question is “Can we survive 3 months while we form our stabilization strategy?”, with Part 2 of the question being “If not, can we get bridge financing?”. You start to answer these questions by analyzing the company’s working capital and implementing a thirteen week rolling cash flow forecast (see the important expanded cash management explanation at the bottom of this article). You facilitate this understanding by developing three cash flow models; a best, worst, and most likely case – but use the worst-case model. Recommended cadence at this point is to meet daily, ask a lot of questions and drill down hard on the assumptions. Don’t let any missed target or odd assumption slide; be brutal in your analysis.
The goal here is to create an environment of no downside surprises. Strive for early victories and consistency as these will contribute to regaining the confidence of the stakeholders, which in turn may buy you the necessary time and commitment for your turnaround.
Pulling Financial stabilization levers: Take immediate action to ease the pressure. Non-complex activities for generating additional cash include implementing shorter invoicing cycles, reducing outstanding accounts receivables (call the client!; offering early payment discounts), extending accounts payable (negotiate new terms), responding to only critical payments, reducing inventory levels, stopping or reducing planned cap-ex, signup cheaper suppliers, tightening purchasing controls (reduce the authorization level and the number of authorized people), ensuring profitable bids through tighter internal approvals and reducing the cost of marketing.
Undertaking a diagnostic review: Review and record the gaps in the company’s strategy, finances, operations, processes and sales and marketing activities as they pertain only to resolving the current crisis (larger changes can occur after you are stable, and your recalibrated strategy is solid). Question - “What can we change quickly to contribute to achieving stabilization?”.
Determining the best path: Given what the financial and business diagnostic review reveals you will have to wisely (non-emotionally and not flying in the face of the facts) choose from one of three options; 1) a turnaround, 2) a sale or merger/divestiture of all or part; or 3) immediate wrap-up. The results of your analysis will most likely show that the decision has already been made for you.
Determining the stakeholders’ agenda: Answer this question early to help guide your path – “What is each stakeholder’s exposure, desired outcome and ability to influence that outcome?”. If there is no appetite for a turnaround from the influencing stakeholders, then there is no sense in proceeding down that path even if it is a financially viable option. To manage stakeholders’ expectations, again striving to achieve an environment of no surprises, we highly recommend implementing an organizational change management program that includes a strategic communication plan. Time consuming, yes, but so necessary at this point!
Assessing key personnel: It is important to determine who supports the initiative and will help, who the detractors are that will get in the way and who has the unique business knowledge you need. You may have to make some initial personnel changes, but to avoid significant distraction and disruption keep the changes to a minimum in the stabilization phase.
Tweaking operations and processes: Consistent with the above strategy, limit process changes to those that will have an immediate material impact on the crisis. Any effort above this level takes important dollars and focus away from the survival priority.
Summary Comments
Remember, the first 100 days is about survival. Keep a narrow focus and move quickly continually asking “What will help generate immediate cash flow?”, and “What’s around the next corner that can kill us?”. Work the plan and expect to see some encouraging signs about four to eight weeks in, but be careful not to let your foot off the gas or change your focus as it is easy to slide backwards when new behaviors are not backed in.
Sidebar on Working Capital and Cash Flow Analysis
A couple of key financial components to focus on always are Working Capital and Cash Flow. Working Capital is the difference between current assets and current liabilities (as at today), while Cash Flow is the amount of cash the company can generate over time (say over a three-month period). The important difference between the two is distinguishing the ability to pay bills immediately versus how things look in the future. Positive working capital provides you the ability to cover near term liabilities, while negative working capital means you do not have enough bank funds, receivables and inventory to meet your obligations. If the working capital does not meet current needs, but future cash flow is positive then, given enough time by your creditors, you can meet your obligations; otherwise bankruptcy is a real possibility.
Rob Hall is the CEO and founder of RKH Consulting. Rob has 20 years’ business advisory experience, including working at a boutique hedge fund and as an investor relations specialist at a public company. He passionately reads about business successes and failures and has researched 100’s of cases studies to expand his strategic arsenal. Like a mystery novel, he analyzes the clues of a company until a successful outcome can be determined. It is within this framework that he founded RKH Business Advisory Services and created the RKH Recalibration Framework.