Running a profitable, high-performing business is challenging. Even great businesses may experience underperformance, financial pressure and mounting debts at one point or another. If this is the case in your business, insolvency may not be your only option. Instead, it may be time to initiate a turnaround strategy.
What is a business turnaround strategy?
Designed to restore a business to a position of strength, a business turnaround strategy will overhaul a business to ensure it is operating optimally, can pay its debts and is in a strong financial position going forward.
In order for a turnaround to be successful, the business in question must have unmet potential. Some businesses may find they are no longer viable due to competition or market disruption and most likely won't be suitable for a turnaround. Other businesses, however, may have in-demand products and services, a great reputation and strong market share, yet are still underperforming. These businesses are often ripe for a turnaround.
Once it's understood whether the business is viable and can be successfully turned around, it's time to put an action plan in place. So, what elements will contribute to a successful turnaround strategy?
In almost all cases, the impetus for a turnaround will be financial. While there are several other factors that can eventually sink a business, serious cash flow problems and rising debt can push a business to the brink of insolvency.
There are several steps businesses should take immediately to get their finances out of the red including cutting costs through reducing headcount, reducing discretionary spending such as on entertainment or gifts, and selling off assets. It may also make sense to seek short-term funding to solve any cash flow bottlenecks and pay off creditors.
Once the immediate financial crisis is averted, it's then time to review how to optimise costs further. Can any costs be consolidated to reduce overall spend? Can supplier contracts be renegotiated? Can you refinance to a more cost effective facility? Can you consolidate any credit cards to one with a lower rate, or make any other changes to reduce fees and improve access to capital?
Simultaneously, you should be reviewing your financial governance processes to ensure they are rigorous and provide you with the right data. Often financial problems go unnoticed until it's almost too late, simply out of poor financial management. Make sure you’re reporting on the right things, that your chart of accounts is optimised, that you’re forecasting cash flow and revenue accurately, and that you have a comprehensive budget. These measures will help you identify and avoid any potential financial problems down the track as well as identify opportunities for growth.
Revisiting the business strategy
It’s important to analyse what went wrong and restructure the business strategy accordingly. Now that you have access to better financial data, you’ll be in a better position to scrutinise the issues without needing to rely on guesswork.
For example, you may find when reviewing your financial data that a new product line hasn't performed as needed and it may be time to phase it out. Perhaps customer acquisition is too expensive. Perhaps your business is vulnerable to market changes and needs to diversify to spread the risk.
By analysing performance closely you will get a clearer picture of how you should restructure your business strategy to maximise performance and inform future business decisions such as whether to enter or leave a market, where to invest, and whether you need to downsize or divest.
In many cases a change in leadership may be required as part of a turnaround strategy, particularly if it is found that the former leadership is responsible for the business’ underperformance. It may be time to install a new CEO and senior management team who will benefit from a fresh set of eyes to drive the turnaround. This will also serve to instill confidence in investors, customers, employees and other stakeholders while showcasing a genuine commitment to shifting gears in the business.
Typically there will be opportunities for improvements in business processes to deliver efficiencies and maximise profitability. A good place to start is to identify what can be outsourced, automated or delegated. Any opportunity to improve productivity and bring down labour costs will help carve out profit margin.
Other processes that may require attention include the sales and marketing process to ensure you’re winning and converting enough leads, risk management to ensure you’re recognising and mitigating any potential risks or compliance to ensure you’re meeting regulatory or other requirements.
Focusing on your people
A business turnaround represents a major change in the business. Guiding your people through this change is essential. It's important they feel supported, especially if you’ve had to reduce headcount and their former colleagues have lost their jobs. Building understanding and buy-in on the exciting changes that lie ahead is important.
A close focus on your people will help you understand where there may be untapped potential, whether there are any morale issues to address and whether any additional changes to the team structure may be required. Make sure you’re communicating with the team frequently and well. The business’ future performance relies heavily on the performance and productivity of your team.
If you’re concerned that your business is starting to spiral out of control, it's best to intervene early. Don’t wait until you’re faced with insolvency, get ahead of the issues so you’re in a better position to turn things around. Make sure you have the right accounting partner on your team to help identify any potential issues early and guide you through a successful turnaround process.
At Keeping Company, we’re not just accountants, we’re business people too. With our counsel, your business can reach its full potential.
We have a team of experts; Cloud Accountants, Business Advisors, Finance Specialists working together and ready to help, contact us today.
For all media enquires please contact Tracy Miller, CMO, Keeping Company 0414 898 452.
The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.