Preface: Successful distressed business turnarounds are achievable. Read further to see the steps in a turnaround and learn the importance of monitoring key performance financial indicators often in your business to avoid a situation of financial stress or distress in your business. 

 

A Business in Distress Requires Decisive Action

 

Prevention or amelioration of a distressed business situation(s), requires decisive action. The longer you wait to take action, the lower the probability of turnaround. Most business owners know when they are in severe financial trouble. Most however, wait to long to take action or initiating a turnaround plan. The more severe the financial and operational stress, the lower the probability of a successful turnaround; and the fewer options available to those managing the turnaround situation.

 

The manifestation of business distress begins most often with inadequate working capital. Sometimes a business has a viable working model, but the working capital is drained entirely from the pond, and all but the small fish are gone. The fish are your businesses financial resources. It most often begins with an increase in liabilities. Say accounts payables increase, vendors begin to limit terms on purchases, and this begins to crimp the businesses ability to operate. Accounts payable increases are not the only sign your business needs a turnaround. Trouble with making payroll taxes payments, payroll and/or loan payments are all indicators your business is beginning atrophy. A failed loan covenant, or inability to refinance, combined with the financial over-leverage from ballooning liabilities will create additional stress, and prohibit sound decisions. Some times financial distress appears slowly, sometimes quickly. One of the key factors in distressed situations is departure or lack of key employee resources in the business. Egress from a distressed business situation will not be obtained from the same practices that commenced the situation.

 

An ounce invested in prevention of atrophy of your golden goose, is smarter than the pounds paid for the cure. Prevention begins with accurate and timely financials to make appropriately decisive and accurate  decisions.

 

However, should you find your business pond (working capital) quickly evaporating in resources; you need to take immediate action. The length of time you wait to acknowledge the pond level is decreasing and assemble a turnaround team, will often be a key determining factor in the success of the turnaround, i.e. successful restructuring.

So what are the steps of a successful turnaround.

1. Stabilize the businesses financial position. This can begin with sale of excess inventory, property and equipment, reduce costs and expenses, e.g. payroll, office, rents, negotiate prices with vendors, etc. Stabilization will require forecast for liquidity, working capital requirements, and cash flow management.
2. You need to assess the options. Should you sell the business, liquidate, or restructure? You will need the key advisors to assist in making this decision. You will need even more fortitude to act on those decisions. You will need a team of advisors with experience in operations, finance, legal, and valuation. You will need financial and industry forecasts to develop sound decisions on the future potential of the business. The team will need assess how much financial risk, or additional financial and operational risk they think is reasonable to turnaround the business. A plan for the turnaround will need prepared.
3. The turnaround will need implemented. The turnaround implementation can be a restructuring of the business and its liabilities, a sale of the business as a going concern, or liquidation of the business.

The two main reasons most business fail when involved in a turnaround, is they first wait to long to retain turnaround advisors, and secondly, falter with implementing on that advisory teams advice.

Summary: Sometimes a business experiences financial stress. The more severe the financial, management, and operational stress or distress the lower the probability of a successful turnaround; and the fewer options available to those managing the turnaround situation. Egress from a distressed business situation will not be obtained from the same practices that commenced the situation. Decisive action will be required, with a team of trusted advisors.