Magazine article Business Credit

Management Turnarounds: Diagnosing Business Ailments (Part 1). (Business-Credit Selected, Topic)

Magazine article Business Credit

Management Turnarounds: Diagnosing Business Ailments (Part 1). (Business-Credit Selected, Topic)

Article excerpt

Introduction

Businesses today are confronted with unique challenges caused by rapidly changing financial and market conditions. The rapid growth conditions businesses experienced during the 1990s have been replaced with financial and market uncertainty. The business models of the 1990s are not applicable to business in the 21st Century. The current business environment is one of unpredictable instability, which can lead a business into rapid decline if its management does understand the signals of business decline. Businesses that were growth or technology driven find themselves in a declining market where capital is scarce and venture capitalists are retrenching. Acquisition driven growth, initial public offerings and secondary public offerings have been replaced with debt offerings. Equity offerings have diminished and can only be offered by companies with long and successful histories. Companies without substantial financial statements cannot easily access capital.

Many businesses have only existed in conditions of growth with readily available capital. Their management must be prepared to understand how to manage their businesses under conditions of uncertainty and financial paucity. Timely capital expenditures can save a business and help it grow in our new business environment. Unnecessary assets can become liabilities, as can inventory build-ups. Astute management is able to provide stewardship during these uncertain times and recognize the signals of business decline.

Long before a business commences its decline, warning signals start flashing, but managers often do not notice the red lights or they ignore them. When they finally do acknowledge something's amiss, some managers will treat the problem as a temporary phenomenon, putting out the fire but not remedying the hazard. Business failure is marked by early signals of decline that often go unobserved or ignored. A strong management team should be aware of any potential difficulties or signs of trouble and should deal with them accordingly. Neglecting these warning signals can cause irreparable damage to your business and rob it of its profit potential.

An important aspect of identifying early signals of business failure is an understanding of the effect that internal and external business environments have on business stability and profitability. The internal environment consists of finance, production and marketing/distribution functions. The external environment is considered hostile and uncontrollable by management and, consequently, managers often shy away from trying to control it. This environment consists of legal/political, cultural/social, competitive, economic and technological elements. The internal environment is the easier of the two groups for management to control; but negative changes often go unnoticed and can cause the business to falter.

To survive in today's business environment, a company's management team must be able to react to changes in the internal and external environment. By understanding the business environments and how they affect your business, you can locate and correct problems before they become too great. This is an important first step in the management turnaround process.

The Internal Elements

Mangers often blame business decline on external market changes, unforeseen competition, financial market instability and technology changes--uncontrollable elements. While these excuses sound good, the major causes of business failure lay within finance, operations and marketing--the internal elements of a business. The internal elements of finance, production and marketing/distribution include within them accounting, production and advertising. It is management's responsibility to control these elements. They have direct control over these functions and are the force that drives them, yet 80 percent of business failures are caused by management's inability to control the internal elements. …

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