Turning around a troubled entity is complex. There are many stakeholders: a nervous board, a thin-skinned management team and worried employees are just the beginning. There are customers who might run for the exits, partners second guessing their alliances. Public companies need to deal with the stock market expectations while private companies have private equity investors on their heels. If things are really bad, then the business needs to deal with lenders, creditors and potentially courts. Here are the five major stages of the turnaround process:
Stage 1: Situation Analysis
Your objective is to determine the severity of the situation. Is the business viable? Can it survive? Should it be saved? Are there sufficient cash resources to fuel the turnaround? This analysis should culminate in formulating a preliminary action plan that shows what is wrong, what potential solutions exist, key strategies to turn the entity in a positive direction, and a cash flow forecast (at least 13 weeks) to understand cash usage.
Important steps at this stage: Identify what product and business segments are most profitable, particularly at the gross margin level, and eliminate weak and nonperformers. Make certain that all functional areas (sales, production) are working to support the goals of their counterparts.
Stage 2: Management Change
It is important to select a CEO who can successfully lead the turnaround. This individual must have a proven track record and the ability to assemble a management team that can implement the strategies to turn the company around. This individual most often comes from outside the company and brings a special set of skills to deal with crisis and change. She will stabilize the situation, implement plans to transform the company, and then hire a replacement.
It is essential to eliminate obstructionists who may hamper the process. This could require replacing some or all of top management. This will undoubtedly mean also replacing some of the board members who did not keep a watchful eye.
Stage 3: Emergency Action
You have to gain control of the situation, particularly cash, and establish breakeven. Centralize cash management to ensure control. If you stop cash bleed, you enable the entity to survive. Time is your enemy. Protect asset value by demonstrating that the business is viable and in transition. Usually you have to raise cash immediately. Review the balance sheet for internal sources of cash such as collecting accounts receivable, and renegotiating payments against accounts payable. Sell unprofitable business units, real estate, and unutilized assets. Secure asset-based loans if needed. Restructure debt to balance the amount of interest payments with a level a company can afford.
Lay off employees quickly and fairly. It is much better to cut deeply all at once, than to make small cuts repeatedly. Remaining employees can focus on work if they have (relative) job security.
Stage 4: Restructuring
The goal is to create profitability through remaining operations. Stress product line pricing and profitability. Restructure the business for increased profitability and return on assets and investments. At this stage your focus should change from cash flow crisis to profitability. Fix the capital structure and renegotiate the long and short term debt.
Incentive-based management will drive employees to get involved smartly. Create teams of employees to identify and rework inefficiencies and promote profitability. There are only two ways to increase sales. Sell existing product to new customers. Sell new products to existing customers.
Stage 5: Stabilization and Re-growth
Now its time to institutionalize the changes in corporate culture to emphasize profitability, ROI, and return on assets employed. Seek opportunities for profitable growth. Build on competitive strengths. Improve customer service and relationships. Build continuous management and employee training and development programs to raise the caliber of your human capital.
This could be time to restructure long term-financing at more reasonable rates now that the company is stable and on a growth path
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