What are Turnarounds?
Turnaround in finance is when a company has been experiencing financial distress and there is a plan to return it to profitability. These plans are typically created when the CEO has been terminated with substantial losses in the company’s net worth and there is a lack of confidence that a new CEO can improve upon these numbers. In this situation, a third party is brought in to review the situation and often take over control of the board of directors. A series of management changes will begin along with layoffs and cost cutting measures which will be implemented quickly to bring about short term cash flow improvements. These measures can be reversed once the company has been turned around.
Turnaround plans are a risky endeavor for a company and a challenge for a CEO. It is very hard to drop costs quickly without affecting customer service or sales, therefore it is often better to grow revenue through expansion of the market, new products and pricing adjustments. External financial support from investors may also help along with access to capital from banks or bond selling to finance cuts in expenses. However, if additional capital is not available then the entire plan will fail, so cutting costs becomes necessary.
The goal is to keep the employees on board by paying them some of their salary every week or month that they are at work. If the employee believes that there is a future at the company, he or she will continue to show up for work until eventually there is reason to quit. The cutbacks require attention on what is working, what isn’t and how much it is costing the company. This can be summarized in a profit and loss statement (P&L) which will show where the money has come from and where it will need to come from in order for the plan to succeed. When all of these elements are in place then positive cash flow will start occurring if enough employees return after layoffs occur.
How to Curate Turnaround Strategies
The best turnaround plans are founded on three things.
1) Clear strategy
2) Strong leadership with expertise in the company’s core business
3) Financial firepower
When all three are present, a company can develop a sustainable plan to achieve success. But when at least one of those pillars is weak, the entire enterprise can crumble under its own weight.
1) Clear Strategy – The first step in any turnaround plan is clear strategy with measurable goals and objectives. Without this direction, employees and other stakeholders will be left grasping for what to do next – nothing benefits from lack of clarity more than an organization experiencing turbulence.
2) Strong Leadership – Clear strategy is worthless without strong leadership to execute it. Truly effective leaders provide a solid foundation for a company to achieve its goals. They must be willing to take risks and build credibility with the organization’s target customer base, but also be willing to make unpopular decisions that may not benefit them personally. These tradeoffs are necessary if the company is going to succeed in the long-term.
3) Financial Firepower – The cornerstone of any turnaround strategy is access to resources from lenders and investors. Without the ability to pay the bills, the turnaround plan will fail. On Wall Street, this typically entails having access to advanced investor due diligence and business plans, as well as enough capital to support the company’s goals for an agreed-upon period of time. Without these elements, a company can be crippled by debt until it runs out of cash.
Turnaround strategies that are not founded on clear strategy or strong leadership may succeed temporarily due to other factors, but usually result in disastrous outcomes for investors within a few years of their implementation.
Characteristics of a Turnaround Plan
All three pillars need to be present in order for a turnaround plan to be effective. Without finance to support the necessary restructuring, it is impossible to execute a strategy that will bring success.
If the company is strong on all three, then their best chances are with an active board that can oversee operations and still have time to pay attention on the financial status of the company. This means they need an experienced board of directors who can focus on how to make this turnaround happen. They also need to have leaders who are clear about what they want, but also willing to listen to advice from others about how it can be accomplished. Lastly, they may need some advanced Wall Street or financial expertise in order to analyze what they will be working with.
In a turnaround, the confidence in the organization’s future must come from its leadership, not from investors or analysts.
How Fintalent Can Help Implement Your Turnaround Goals
Fintalent’s pool of tier-1 Strategy Consultants can evaluate your business and help determine the best course of action to achieve a turnaround. By carrying out comprehensive technical and bottom-up analysis, as well as portfolio analysis thanks to the presence of expert investment managers, Fintalent provides expertise to see through a turnaround from conception to implementation.
