Magazine article Journal of Banking and Financial Services

Turnaround Management More Than a Buzzword? Turnaround Management Is Very Topical at the Moment with the Proposed Introduction of Voluntary Administration in New Zealand. but How Do We Make Turnaround Management a Reality, Rather Than Another Pleasant Euphemism for Insolvency?

Magazine article Journal of Banking and Financial Services

Turnaround Management More Than a Buzzword? Turnaround Management Is Very Topical at the Moment with the Proposed Introduction of Voluntary Administration in New Zealand. but How Do We Make Turnaround Management a Reality, Rather Than Another Pleasant Euphemism for Insolvency?

Article excerpt

What makes a successful business turnaround?

Business success is commonly measured by whether the return on assets meets or exceeds the weighted average cost of capital. For a business to be successful, its managers must have a clear and considered vision of where the business needs to be and this must be supported by the implementation of appropriate plans to achieve this vision. Key factors affecting business success include:

* An understanding of the market, particularly customers, competitors, and any environmental issues that affect the market;

* A good understanding of the business itself: strengths and weaknesses, core competencies, people, equipment and intellectual property resources in order to identify and capitalise on its competitive advantage;

* A focus on driving profitability by maximising sales prices and volumes, and minimising the direct cost of sales and overheads;

* Efficient balance sheet management by increasing the sales generated for every dollar of total net assets (working capital plus non-current assets) invested in the business; and

* A strong management team with access to timely, reliable and useful information with which effective decisions can be made that build a strong business model.

All of these elements are interrelated and must be given equal attention within the framework of a single, integrated plan. Otherwise, the real reasons for poor performance and failure can be overlooked.

For example, a common reason given for a business' underperformance is that it needs more sales. However, overhead costs may also be too high. In trying to increase sales, it is also important to consider the competitiveness of the market, the effectiveness of existing marketing and sales plans and, in particular, the competency of the salespeople employed to implement those plans.

What are the key determinants of whether a business can be successfully turned around?

There must be a sound economic reason for the business to exist

The existence of an economically viable core business is essential to stabilise the company and finance the turnaround. This is likely to involve shrinking the business back to those parts of the business that provide a positive cash flow.

The stabilisation of the business then provides some breathing space to work out how the company can differentiate itself in the market, in order to grow sales and profits again in a sustainable fashion. If a business expands its product and market portfolio too rapidly the business will lose control again and profits will be diminished. The 80/20 rule holds true for many businesses: 80 per cent of margin is achieved from 20 per cent of product lines or customers. Therefore, the focus needs to be on the core (and profitable) customers and product lines, avoiding excessive diversification.

Adequate bridging finance must be obtained to fund the business until it can generate its own positive cash flow again

Initially, cash flow is required to keep the business afloat, either through external sources such as lenders and creditors, or internal sources, such as profitable divisions of the business or the injection of additional capital by existing or new shareholders. The first step is to determine how much cash is needed. A robust, integrated 12-month financial model (incorporating a profit and loss, balance sheet and cash flow statements) and 13-week cash flow forecasts are all essential requirements in this process.

Any external or prudent internal financing sources will also want to see these forecasts supported by a credible restructuring plan that demonstrates why and how the business is going to be turned around. Such a plan should cover the strategic, operational and financial changes that are to be made to the business to underpin the forecast improvement in profitability and cash flows.

Motivation of management and staff

The stress of a failing business on management and staff can be very debilitating. …

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