The business environment has become volatile and unpredictable, leading an increasing number of organizations to change quickly or risk going out of business. Whether economic uncertainty or market changes, organizations are facing unexpected challenges requiring action.
For an organization to have a chance at surviving a crisis, management must consider turning around a company when addressing declining or negative profits and stagnating sales. Restructuring is the final option when addressing cash flow issues or insolvency and bankruptcy.
There are three phases of a company emergency: a strategic crisis, a profit crisis, and a liquidity crisis.
At this point, management typically loses the ability to make changes on their own and requires outside assistance. A successful turnaround that minimizes the pain of bankruptcy requires the following:
We dive deeper into each of these below.
Many organizations immediately begin a turnaround or restructuring initiative by executing a cost takeout effort. Investments, head count, and projects are immediately cut with little analysis. While this may initially stop the bleeding, it usually doesn't address why a company is in crisis.
Taking a step back to understand why there's a need for change is critical. Is your organization losing market share? Is the current economy taking a toll on your business? Organizations rarely have the time for trial and error.
Understanding the stimulus for change enables existing or new management to channel their remaining efforts in the right areas.
After identifying the reasons for change, conduct a thorough deep dive to determine improvement areas to focus on.
For organizations losing market share, the focus should shift toward how to improve sales, marketing, profitability, inventory turnover, and customer retention. Are current customers providing the right mix of revenue and profit? Operations should focus on providing high-quality, cost-effective services to retain those customers while seeking additional opportunities.
Organizations facing macro market forces out of their control, such as a drop in oil prices, should broaden their focus to working capital management and operational restructuring initiatives. The overall cost structure must support demand while generating profitability.
Additionally, identify revenue enhancement opportunities to drive new sales forecasts. Once these forecasts are created, management can determine how organizational structures, processes, and systems should be changed. This may involve rethinking traditional ways of doing things, from streamlining supply chain processes to adopting new technologies that enhance operational efficiency.
Management must evaluate asset profitability. Are all assets contributing to the bottom line? Is there room for improvement in inventory management? Could reducing SKU numbers lead to cost savings?
Vendor management is another area to scrutinize—can renegotiating contracts or exploring alternative suppliers reduce costs? Look at credit management policies and lease cancellation options to further optimize costs. Every aspect of the business must be analyzed and optimized for a successful turnaround.
An effective turnaround or restructuring process involves the buy-in of everyone associated with the organization. This includes management and stakeholders—i.e. banks, private equity firms, shareholders, and importantly, employees. Each of these entities has a significant stake in the organization and must be brought on board early in the process. Clear communication of what’s going on, potential challenges, and anticipated benefits of restructuring efforts can foster understanding, acceptance, and support from all corners.
Banks and private equity firms, for example, play crucial roles in providing financial support during a restructuring phase. Keeping them engaged from the start with regular updates and open dialogue increases the chances of continued monetary backing.
For employees, clear and transparent communication is key. Employees, especially those who are integral to operations, are more likely to stick around if they have a clear picture of what’s going on, how it impacts them, and the expected outcomes. Moreover, if the situation requires difficult steps such as pay cuts, employees are more likely to accept these if they feel involved in the process, understand the reasons behind the decisions, and see a path to future stability and success.
At the same time, it's important to listen and respond to the concerns of these stakeholders. Open two-way communication can help address issues and reduce resistance to improve overall commitment to the restructuring efforts.
Once management understands the root causes behind the profit and liquidity crises, it's time to plan for recovery. The ideal next step is to create a 13-week rolling roadmap that addresses liquidity concerns. This quarter-by-quarter plan, updated weekly, provides a clear view of cash flow and helps manage short-term financial health while longer-term strategies take effect.
The roadmap should outline actionable steps to boost customer profitability and retention. Simultaneously, the roadmap should include plans for G&A cost takeout. This could mean renegotiating supplier contracts, streamlining administrative procedures, automating manual processes, or optimizing the use of office space and equipment. Operational cost takeout should also be a key focus. This may involve process improvements, workforce optimization, and the use of technology to increase efficiency and reduce waste.
The timeline for developing this roadmap can be flexible based on the organization's needs. In situations where a more rapid response is required, the roadmap can be accelerated to be completed in 4-6 weeks. The important part is to have a clear, achievable plan that balances the immediate need for financial stability with the strategic vision for future growth and profitability.
At Trenegy, we help companies regain control of the restructuring process by making it a proactive experience. For more information, reach out to us at info@trenegy.com.
