Making decisions with significant downside risks are a necessary reality of achieving a successful turnaround.
Avoiding such risks/decisions is worse than doing nothing at all, while unfortunately the decisions often involve unattractive choices between “bad and less bad” outcomes.
Applying a traditional risk/return model in these situations can help with assessing the conundrums facing management and directors.
Simply, a company will have to be prepared to take some risks to get the results required to extract a company from its financial position. The flipside of such decisions are greater risk of failure of the turnaround and indeed the corporation.
Not taking such risks is a bit like business as usual, getting the same results as previously while condemning the business to only limited improvements which may not be enough to change the fortunes of the company.
The upshot, you have be prepared to take some risks!
Here are 5 major risks/decisions in a turnaround and some relevant issues to consider in your approach to them.
New/changes to management – a fundamental requirement for many turnarounds to succeed is replacing people or introducing executives with different skill sets and for your updated management team to quickly “gel”. However, the process can be expensive, emotive and challenging as new people are integrated into a business with no guarantee of success or the planned outcomes. All good turnarounds are management led, and therefore the focus must be to get the right team in place while inculcating staff with a willingness to be flexible and work with new people and structures.
Funding exit/restructuring costs – this feels counterintuitive ie when a company is experiencing financial stress, it is spending cash on restructuring costs such those for exiting geographical markets, product lines and leases and for redundancies. In the longer term a turnaround is not possible without a profitable business model and therefore these costs are best incurred as soon as possible and before the losses/cash drain are even greater.
Aggressive cash management – accelerating debtor collections and creditor stretching can risk customer relationships and supply/credit arrangements respectively. Again you have to take some risks while finding a balance point in your approach chase your debtors but don’t allow this to materially effect your sales and CRM. For creditors, “stretch” them but not such as to stop supply and/or effect credit ratings. The risks involved in this type of cash management are sometimes overstated for both debtors (by sales people) and creditors (by finance staff), once you make the hard calls you will find that the world keeps turning and most of your customers/suppliers are used to this cash management dynamic!
Expensive debt funding – sometimes more debt is the only way for a company to have a funding bridge until profitable trading returns (again a little counterintuitive). The cost of such debt funding and the terms and security required in a turnaround will always be more onerous. The reality is that a financially underperforming company is a higher risk customer for a financier and you will be charged accordingly. Try to limit the periods of such funding, as high priced debt will not be sustainable in the longer term.
New business model – this is the biggest risk of all but it may be the only choice when for instance the existing model is no longer competitive due to materially cheaper equivalent goods/services being available, poor existing supply chain or declining demand. More than any of the above, this sort of change requires longer term planning and consideration. Financial realities will often create the burning platform to speed up this process!
Finally, another risk to mention is a personal one for management, directors and boards and that is acknowledging your responsibility for the position that a company finds itself. A little risky, but also a great way to rebuild trust and move on with the turnaround.