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When a business is experiencing financial problems, swift action must be taken to resolve the situation and turn things around. But what exactly is involved in a successful business turnaround? And what actions need to be taken?
In this seven-part blog series, we identify seven critical turnaround strategies that can be implemented to guide a business back to black. The first and most critical step is crisis stabilisation.
What is crisis stabilisation?
Crisis stabilisation refers to the measures used to immediately ease the financial stress a business is experiencing. The faster crisis stabilisation can begin the better the chances of business survival.
The key objectives of crisis stabilisation are to:
- Conserve cash in the short term
- Rebuild stakeholder confidence by demonstrating that senior management has taken control of the situation
- To begin to reintroduce predictability into business operations
Understanding the crisis stabilisation process
As soon as crisis stabilisation begins, things must move very rapidly in order to take control of the situation and start aggressive cash management.
The first step is to collect and review all the businesses financial documents, including:
- Balance sheet comparable for the last three years
- Profit and loss comparable for the last three years
- Budget versus actuals
- Cash flow forecast
- Business plan or strategic plan
- Organisational chart
- Aged receivables and payables
- ATO running account
These documents provide an opportunity to adequately assess the situation and help determine where the business currently sits and how severe the situation is. With these insights, effective actions can then be taken.
If a business doesn’t have these documents readily available, they need to pull them together as quickly as possible.
1. Conserving cash flow
After the initial review, conserving cash flow is the next step in crisis stabilisation. Maximising a business’s cash flow boosts its ability to service debts and gives banks and other lenders confidence to offer assistance.
Conserving cash flow includes cash management, quick asset reduction, short-term financing and first-step cash reduction.
Some of the main ways to do this when a business is in crisis include:
- Sale of non-core current assets or disposal of surplus plant and machinery
- Establishing financial controls, including putting new processes and procedures in place
- Implementing immediate cash flow changes, including:
- Liquidating surplus stock
- Improving debtor collection and stretching creditor payments
- Putting all capital expenditure (except essential) on hold
- Increase prices or run a promotional event (this should be done by exception only)
In addition to this, the business’s finance team should draft a weekly and 13-week cash forecast. Plus, their finance broker should look to revise their funding mix and introduce short-term funding solutions.
2. Rebuilding stakeholder confidence
In crisis stabilisation, taking control of the emotional response of employees and other stakeholders is just as important as taking control of cash flow and finances.
With the business in trouble, employees may be feeling uncertain and worried that they’ll be out of work. Suppliers might also be on edge, thinking they won’t get paid.
The best way to manage this is to demonstrate that senior management is taking control of the situation and keeping the communication lines open. This will help rebuild confidence in the business.
Be direct, open and honest and acknowledge any concerns. But, at the same time, don’t make early promises you’re unable to keep.
A good way to communicate the message is to identify influencers in the business, ensure they’re on board with the situation, and ask them to spread the message.
If employees know what’s going on and that clear action is being taken, it will prevent dissent and ensure they continue to work to their best ability. It will also deter suppliers and other stakeholders from pulling back or taking action.
3. Reintroducing predictability
Another vital part of crisis stabilisation, once the finances are under control and stakeholder confidence is being managed, is to reintroduce predictability into the business.
Predictability can mean a number of things, including ensuring that people can see the future course of their interactions with the business and that business continues as usual, as much as is possible.
Job responsibilities and reporting lines should also be reaffirmed so that people are clear on what they should be doing as the crisis is handled.
Important elements of crisis stabilisation success
There are five key elements critical to crisis stabilisation success:
- Taking control of the situation – This means grabbing hold of these levers and nailing down hard on targets, measuring results and being vigilant.
- Tough decision-making – Financial decisions are never easy, especially in times of crisis when the pressure is on, but they must be made fast.
- Maintaining visible leadership – Leaders should be active, participate in meetings and communicate frequently, demonstrating they’re still leading.
- Delivering quick wins –Actions that swiftly lead to ready cash flow and an easing of the financial strain will improve the situation and attitudes.
- Dealing with dissent – Directors and other stakeholders will have differing opinions on what to do. They must be quickly aligned.
Next steps: Leadership cuts and reshuffling
Once the finances are stabilised, stakeholders have been managed and a level of predictability is evident, attention should be turned to leadership. To find out more, look out for the second blog in our seven-part turnaround strategies series.
If you have a client facing financial difficulties, contact us today to set up a meeting. We’re experts in stabilising struggling businesses and can help them turn things around and get back on track.