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Two of the major drivers of business failure are unchallenged business models and a lack of action when businesses find themselves in a tight financial position.
In these situations, it’s vital that an appropriate turnaround strategy is implemented quickly to give the business the best chance of survival – and to avoid a formal insolvency appointment.
The following is a broad overview of the major steps in turnaround strategy, and how such a strategy would play out in the real world.
Analysing the situation
This involves determining the chances of business survival, identifying appropriate strategies, and developing a preliminary action plan.
Questions to be asked:
- Is the business in imminent danger of failure?
- Does it have substantial losses but its survival is not yet threatened?
- Is it merely in a declining business position?
The three major requirements for the viability of an organisation must be analysed. These are:
- One or more viable core businesses
- Adequate available financial resources
- Sufficient organisational resources
If the above are present, the following should take place:
- A detailed assessment of strengths and weaknesses (competitive position, engineering and R&D, finances, marketing, operations, organisational structure, and personnel)
- Increased stakeholder communication
- Development of a strategic plan with specific goals and detailed functional actions
- Management must be accountable to deliver these goals
Implementing the plan
Should the review identify any major financial issues, a turnaround plan must be implemented. Some common steps in a turnaround plan include:
- Determining the current labour requirement and rationalise workforce where needed
- Closing underperforming business units and returning focus to the organisation’s core business operation
- Changing the management team and structure
- Eliminating any unprofitable lines of business where possible
- Identifying any surplus assets and determining if these assets can be realised in a timely manner
- Eliminating any unnecessary capital expenditure
- Improving the accounts receivable collection process
- Focusing on the cash flow of the business
- Communicating with financiers and creditors
- Continued focus on service for customers
- Seeking advice from advisors
In the final step of a turnaround, an organisation slowly returns to profitability. While earlier steps concentrated on correcting problems, the final stage focuses on profitability and return on equity, and enhancing economic value-added.
For example, a company may initiate new marketing programs to broaden their business and customer base and increase market penetration. It may also increase revenue by carefully adding new products and improving customer service.
This final step cannot be successful without a culture shift. Rebuilding momentum and morale is almost as important as rebuilding return on investment. It means a rebirth of the corporate culture and transforming negative attitudes to positive, confident ones as the company maps out its future.
The key in any turnaround is to take action early and seek appropriate advice from your advisors before the situation is taken out of your control.