What is a Business Turnaround?
A business turnaround is a period of time that typically ranges from three to twelve months during which a company attempts to improve its financial performance by implementing new initiatives on all levels. The goal is often defined as returning the company’s core operations to profitability and/or earning at least 50% of the previous year’s revenue. Sometimes, it is also thought that turning around a struggling business may result in an increase in market share or market value.
Business turnaround is described by Fintalent’s business turnaround consultants as a form of return on investment (ROI). Specifically, it is the use of specific activities and processes to improve financial performance in an existing business, or create a new one from scratch. To measure results, many managers use return on assets (ROA), return on equity (ROE), cash flow per share (CPS), and more. The focus is to use the cash resources of an investment to generate an adequate return on investment.
A business turnaround must be viewed as a long-term process, but short-term results are also important in measuring how successfully the process is working.
A business turnaround should be planned and executed in phases. This allows management to see what will work and what will not work, to adjust strategies in each phase, and move ahead more effectively.
The organization should be encouraged to have solutions that are more than one and more than two, but not so many that they become unmanageable.
Business turnaround has been described as a process of “turning things around,” “getting out of the rut,” “starting over” or “taking control.” Regardless of the description, it usually involves three to twelve months of management intervention, which may vary from strategy to strategy.
The best way to end a period of decline is one in which the company has improved its financial performance by an amount equal to or greater than its share price depreciation. If the company has been losing money, it must be generating positive cash flow by the end of the turnaround.
Any business that operates for a sufficiently long time will experience periods of hard times. An “accident” occurs when a given change in circumstances is unavoidable. In some cases, survival comes down to finding new customers and filling unmet needs; in other cases it is necessary to reduce costs in order to survive. If a company continues losing money or revenue during a period of decline, then managers should consider whether they need to cut costs (reduce expenses) or grow revenues (increase sales). Both strategies need to be pursued at the same time; one without the other may mean continuing losses with no chance of change. With the right strategies, a company can survive and even thrive in difficult times.
Why Embark on Turnarounds?
A turnaround does not occur just because management feels it needs to happen; it must be planned with thorough consideration for all the elements involved. A turnaround plan should include a three- to twelve-month “turnaround time frame”. To cover the time frame, the plan can include initiatives that will be possible before and after the time frame. Making sure that there are enough staff and sales personnel to cover all areas is important. As well as being realistic about expense reductions; management must be able to provide for training, development programmes and equipment replacement where necessary – providing that this does not disrupt operations. The plan should clearly outline each financial goal, and how it will be achieved. This can include a cash flow statement which must match the profit and loss statement. The plan will also cover the human resources element; all people within the organisation, from directors to each employee, must be committed to the plan or it will not work.
The plan should cover:
Financial goals—setting financial goals for a turnaround is about more than just cutting costs. Managers should set specific financial performance objectives and time frames for achievement; their organisation’s performance is measured against these objectives. Often, financial performance metrics are used to measure progress toward reaching goals. Financial metrics that can be used to measure progress toward goals include gross profit margin, operating income as a percentage of sales, and return on assets (ROA). Return on equity (ROE) is another financial performance metric.
Incentives—for a turnaround to be successful, it must have financial incentives for management and employees. Emphasising incentive programs for top managers creates pressure to perform. Cutting costs or raising revenues is incentivised with bonuses or profit sharing. Costs are reduced by laying off staff, which creates an incentive for remaining staff members to work more efficiently with fewer resources. This pressure to perform is also created by using quality circles and team building.
Staff training—for a turnaround to succeed, management must be able to involve staff and suppliers in different ways. This can be done through quality circles, where a group of staff members meet regularly to brainstorm ideas. Every idea must be documented and evaluated, with the successful ones being implemented. Team building is another way of involving people in a turnaround; encouraging group activities such as rock climbing or paintballing helps build teamwork for improving efficiencies inside the workplace.
Operating strategy—turnaround strategies must include ways of increasing revenues and reducing costs. Increasing revenues may involve price changes, a new marketing approach, or a new product line. Reducing costs could mean outsourcing; they should never be done in-house if it is possible to pay outside contractors. In outsourcing, the company can focus on core competencies without having to lower overall costs; this is only possible if the company has a core competency.
A business turnaround can be an effective method for recovering from the effects of recession; by adjusting strategies for reducing expenses or increasing revenues. A range of different strategies can be used, but if all are not included in the plan then some will not be effective. After the plan is implemented, it is important that company performance evaluation continues on a regular basis; this will ensure that a business turnaround strategy brings about the expected results.
