All businesses encounter problems at some stage. Good management sees the red flags early and takes corrective action before the downturn sets in and becomes irreversible. The end game may be an insoluble cash flow crisis, but the trouble starts way before then.
Budget miss
Forecasts are always wrong, the only question is by how much and in which direction; the skill is understanding why and how significant a shortfall in any key area is going to be, then taking the appropriate action. Missing the budget in the wrong direction is a warning sign, which should never be shrugged off as an unimportant blip.
Underperformance and losses
Whether it’s a revenue shortfall, a gross margin under-shoot or overhead cost overruns, the important question is why has the initial budget miss turned into a longer-term performance issue? Is it over optimistic expectations, a market-wide issue suffered too by competitors or is it just your company suffering? If the underperformance has pushed the business into persistent losses, then Houston, there is a problem, the underlying causes of which need to be identified without delay.
Distress
The next stage is deteriorating relationships with suppliers, asking them to cut their prices and/or to give longer credit terms, and with debtors being pressurised into settling bills early by heavy-handed debt collection strategies. Vital capex projects are abandoned. Customer service and product quality deteriorate, delivery deadlines are missed,`and management become defensive about complaints.
Crisis
By this time, the business is constantly up against or over its bank and other credit facilities. It is struggling to pay its staff and a range of debts, such as rent and HMRC liabilities. Suppliers start to refuse to supply or demand cash on delivery. Management are distracted by mounting creditor pressure. Key staff leave. Rumours circulate in its market place.
It’s crunch time – is there a future?
The situation should never have been allowed to get to this point, but even now it can be saved with decisive management action. They must decide if they’re up for the fight to rescue the business. Can they think the unthinkable, say the unsayable and do the undoable? Will they take the sensible course, by calling in independent experts to help with this herculean task?
Stabilisation
Each scenario is different, but every turnaround needs a comprehensive and credible plan based on the particular circumstances. It may involve temporary rescue funding, an honest and open dialogue with creditors, the buy-in of management and most importantly, by staff. It must have clear and achievable objectives. Creditor pressure must be eased, and key stakeholders brought on board with the proposed way forward.
Turnaround
This phase is the implementation of the stabilisation plan, revised as circumstances change, as inevitably they will. Timeframes vary, from weeks to months, sometimes longer. It may be necessary to use a Company Voluntary Arrangement (CVA) to ring fence the business from action by dissident creditors and to enforce haircuts on creditors.
Recovery
The business that emerges will be different to the original struggling entity. It may be smaller, but hopefully more perfectly formed with a revised and properly funded business model, providing a secure future for its stakeholders.
Mark Boast
First published in July/August 2023
