The 10 Key Areas To Review When Your Company is in Trouble
According to Innovation, Science and Economic Development Canada, thousands of businesses exit the Canadian marketplace every year. Additionally, a study by Industry Canada indicates that these exits are resultant of two main problems: inexperienced management and poor financial planning. Fortunately, when a company finds itself it can increase its chances of survival by acting quickly and using a structured and disciplined recovery program.
A crisis, as we define it, is a situation that severely threatens a company’s future existence wherein also the time for decision–making and action is short. Often, the symptoms of crisis, though long in the making, gradually reveal themselves through slowly declining bank balances, creditor repayment prioritization discussions, concerns over making payroll, rethinking staffing levels, postponing investments, and so on. Paying attention to these early warning signs is important: Understand why they are happening, then act quickly.
The 10 Key Diagnostic Areas to Review
In a crisis, one must pause all big plans and concentrate on survival. The foundation of a survival initiative is built on a solid turnaround process that gathers quantitative facts. The initial turnaround step is a detailed diagnostic review that gathers as much information as possible about the current internal and external situation. This information drives the actions for near–term and longer–term actions. Note that many of the diagnostic areas are interrelated in terms of leveraging insights from one or more assessments in the analysis of other sections. The key diagnostic areas of focus are as follows:
Governance Analysis: determines an appropriate structure and strategy for overseeing the company and how a mentor/board/brain trust should be implemented given the company’s objectives and how that entity would contribute to the company’s success.
Stakeholder Analysis: determines who the stakeholders are, their level of power and influence, their commitment to a turnaround initiative, and their ranking (in terms of the above) and devises tactics and messages that could be employed to influence key stakeholders.
Strategy Analysis: determines an appropriate approach to doing business, how and where to compete to better satisfy the market needs (as compared with competition), and how strategy is defined in the company: vision, mission, goals, and guiding principles.
Financial Analysis: determines the soundness of the company’s financial situation and assesses the company’s financial position in terms of capital structure, working capital situation, capitalization level, and performance ratios (i.e., profitability, balance sheet, etc.)—in the crisis phase, the most important financial aspect is cash flow; without it, nothing else matters.
Competitor Analysis: determines an understanding of the company’s competitors—their sizes, strengths, weaknesses, comparative successes, methods of outmaneuvering them (or responses to being outmaneuvered by them), as well as product, revenue, and profitability trends.
Company Analysis: determines the company’s market position (i.e., gaps to close or strengths to further exploit) and usually begins with a SWOT analysis, extending to operations design and quality, financial ratios, and customer up–sell, cross–sell, and new–sell analysis; questions to consider include, “What are the distribution channels and their successes?”; “How the company’s brand recognition strengthens customer loyalty?”; “What is the cost and quality of operations?”; and “Is the company’s product positioned properly as a commodity or differentiable good?”.
Industry Analysis: determines the company’s current state, its opportunities/challenges, what drives the industry in terms of industry changes, how the sector is performing, where the company is in its life–cycle in terms or maturity, and what drives the company’s influence in terms of brand, size, technology, or some combination thereof.
Profitability Analysis: considers the profit and loss statement, determines margins and where adjustments may be available, determines and compares expenses (year–over–year as well as industry and competitor levels), and assesses profitability per product/service.
Leadership Analysis: determines from HR files, peer discussions, and face–to–face sit–downs, which leaders have the skills necessary to help with the turnaround and what their commitment level is (analysis should be performed by the individual leading the turnaround to ensure clarity and mandate-to-leadership alignment).
Front Line Analysis: determines from employees the state of the union in terms of client expectations, internal operations pros and cons, and current employee engagement based on culture, leadership, and tone from the top.
Turnaround will progress through several phases, beginning with the emergency procedure phase, wherein a preliminary diagnostic analysis determines the necessary actions to generate enough revenue to pay bills and supply enough time for a detailed diagnostic analysis.
To begin stabilizing the company and funding its recovery, the company should begin with a heavy focus on the cash flow component of the financial analysis.
Note that the diagnostic review happens in iterations with increasing detail as time passes. The first diagnostic run-through should acquire the information necessary to understand what emergency steps need to be taken so as to procure time for a detailed analysis that supports longer–term turnaround actions.
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.