A Five Step Guide to Turnaround

In the current economic climate, increased numbers of businesses are struggling to maintain profitability. For some, this is a challenge that they are prepared to meet and can weather their way through. But for others, it is presenting a threat to their viability as businesses. Profit warnings are at a 15-year high. Decisive measures are needed.

In my experience as a turnaround professional, there are usually five stages that a turnaround goes through.

The aim here is to quantify the company’s cash reserves and give visibility over how this maps against future cash inflows and outflows. This cash flow forecasting is key to identifying whether there are any upcoming pressures that will require further action. It often throws light on issues the business had not fully appreciated – areas where its cash collection is slower or more ineffective than previously understood, or areas where spend is higher than thought. Sometimes, this liquidity analysis is sufficient to help the business adjust and regear. But sometimes it shows that there are deeper issues which mean that cost really needs to be taken out.

Where deeper and significant remedial action is needed, business spend needs to be tightly controlled and almost certainly reduced. This involves identifying who has the ability to commit the business to spend – its authorisation matrix – and immediately limiting the number of people who can do so. It may mean that all spend over a certain level must be authorised by one person, such as the CFO. The level at which this must happen is also likely to be reduced. A moratorium may also be put "nice-to-have” but non-essential spending – such as training, recruitment, conferences, non-customer or supplier related travel. After this, capex comes under the microscope. What capital expenditure is essential to keep the business running, and what expenditure is new investment? The latter is likely to be stopped completely; the former will be maintained, but perhaps pruned back if current spending is at ‘gold standard’ levels.

This involves analysing, in considerable detail, where the business is spending its money, how levels of spend in different areas index against each otherand benchmark norms, as well as and how this spending links to the company’s trading essentials. The first place where the focus really falls in this is indirect costs – that is to say, in support functions (rather than core operational functions) such as Finance, HR, Marketing, Sales, IT, etc. These areas will be examined both in terms of their people and non-people costs. Which functions carry the greatest cost to the business and what value are they bringing? Often what we’re looking for here is signs of inefficient allocation of resources or spend – duplication, inefficiencies, wastage. For example, I carried out some work for one global business that employed over 50 legal firms to advise it, with multiple firms covering the same specialist areas of law. Working with the General Counsel, it was possible to rationalise these down to a smaller number of firms, creating economies of scale that increased efficiency and generated savings. In terms of people costs, we use industry benchmarks and our own experience and analysis to determine whether efficiencies can be driven. It’s usually possible to do so with careful examination of the activities that are being conducted.

This is a complex area, and is highly bespoke to each business, so takes some time. It also requires a degree of caution because if the wrong decisions are taken in regards to such fundamentally important areas, it can have long-term detrimental effects. With products, the focus is on understanding which products make the most profit and prioritising them, and which products are unprofitable, and eliminating those. I am on the look-out for signs of niche products which have disproportionate influence over a company’s product mix – we want to avoid situations where the tail is wagging the dog. It’s something that happens a lot in the FMCG world – those speciality products that someone somewhere in the management team has a fondness for, but which sell in small numbers, and are produced in small batch runs that interrupt the main production line.

It's a similar principle with customers. Which customers generate the most profit? Which customers are least profitable and/or have the highest cost to serve? Which accounts pay fastest and are the easiest to administrate and run? The aim, in a turnaround situation, must be to make maximum margin from each and every sale and to ensure the cash conversion cycle of customer orders is minimised as far as possible. It may be necessary to slim down operations and focus on major, most profitable and fastest paying customers in the short term. This is also likely to allow the business to reduce its inventory holdings, further reducing cash flow pressure.

Property is usually a longer-term play as it takes time to make disposals or exit leases – but there are usually significant options here. Meanwhile, it is a difficult and often emotional step for management to start thinking about headcount on a significant scale. Businesses, rightly, place great value in their people. In most cases, it’s a step that’s only arrived at once all the other measures have been exhaustively pursued. However, it is good management discipline to challenge manpower levels on a regular basis to eliminate any unnecessary cost creep.

In recent months, we have been seeing significant, growing demand from clients for liquidity analysis and advice. Whether this turns into a rise in turnaround situations requiring rapid cost out remains to be seen. But however things transpire, it is clear that there are lots of avenues and mechanisms that can be pursued to bring the cost base under more manageable control – and we will work side-by-side with management to find the best and most sustainable long-term solutions to help the business emerge stronger and fitter on the other side.