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Business Turnaround Strategies

Provided by SME Solutions Center - Kenya


Failing Business

If your small business is underperforming, you could benefit from turnaround advice. This assistance helps you to transcend the various challenges facing your business in a systematic manner. The business turnaround roadmap informs you how to turn around a business and consists of seven elements. So as to achieve business transformation, you execute these turnaround strategies. The actions include:

  • Stabilising
  • Diagnosing   
  • Reorganising
  • Planning
  • Negotiating
  • Executing
  • Selling or growing

Stabilise

You introduce stability into your business by always having a positive cash balance.  You goal would be that your expenditure be equal or lower than the balance brought forward at the beginning of every trading period. This initiative creates a favourable business environment within which you can make good decisions. With adequate cash, you can properly establish the cause of your problems. You also need to establish a rapport with internal and external stakeholders. Other stabilising initiatives would be being solution oriented and being conversant with your business processes and numbers.     

Controlling your Cash

For stability, you need to control your cash by:

  • Personally signing each purchase order so as to properly manage purchases 
  • Personally signing each check your business writes
  • Preparing a two-month cash flow budget  

Diagnose

With diagnosis, you conduct an industry and company analysis so as to identify the cause of your crisis and possible remedies.  You then plan to eliminate the causes.  So as to identify the causes, you carry out financial analysis. This analysis has several components, including:   

  • Examining your business’ performance ratios for the previous 3-5 years
  • Comparing the ratios to those of similar businesses  by looking at the numbers and variances
  • Moving in to fill in the gaps

You can obtain the ratios of similar businesses from the Risk Management Association of Kenya (RIMAK).

Common Causes of Cash Problems

Your business could be in the red for a number of reasons, key ones being:

  • Reduced sales due to stiff competition or reduced demand
  • Increased fiscal commitments owing to acquisitions or purchase of new equipment and plants
  • Reducing profit margins with stagnant fixed expenses

Reorganise

Your business is likely to have a central production line that always generates positive cash flow. It may have subsidiary lines that do not always produce positive cash flow. Your reorganisation involves sorting the different production lines. Key steps include:

  • Arranging the production lines in descending order with the most productive being on top
  • Identifying the spot where cash flow becomes negative
  • Selecting the upper side lines as your new business’ concentrations
  • Eliminating the lower side lines including their personnel, inventory, and facilities          

Plan

Your first planning phase involves drawing a straightforward turnaround strategy. This plan will require you to:

  • State your goals in quantifiable terms 
  • Describe your main business, employee projections, sales plan, and expense reduction measures
  • Include a cash budget
  • Incorporate a set of cash monthly forecasts

After planning, you approach and persuade creditors to do business with you. Your objectivity and sincerity will help restore your reliability. Creditors will then be motivated to offer you certain concessions. To effectively convince creditors, you need to:

  • Honestly explain the genesis of your present crisis
  • Spell out your plan of getting out of the problems

 Negotiate

Your negotiation requires you to group your creditors into 2 categories, namely:

  • Category I
  • Category II

Category I Creditors

These are the creditors you require to conduct business with in future. They include critical suppliers and banks. Bring Category I Creditors together and do the following:

  • Objectively and positively explain your turnaround plan
  • Explain how they stand to benefit if you successfully turn around

Category II Creditors

These are the creditors you do not need to survive.  You need to negotiate with these. Instead, engage a debt negotiator who will secure a settlement agreement with Category II Creditors on your behalf.  

Execute

Your execution mode determines if you succeed or not. Without it, your business is likely to suffer a slump even after securing creditors’ approval and backing.  proper execution requires you to:

  • Institute and stick to a weekly turnaround program
  • undertake all turnaround tasks so as to be accountable

Sell or Grow

Depending on the outcome of your turnaround program, you could opt for either of two options, namely: 

  • Expanding your business
  • Selling it off

Growing your Business

In case you foresee yourself being in business for the next couple of years owing to good performance, you would naturally want to expand it. You have learnt important lessons from your turnaround experience. Managing your now profitable business will thus be easier.   

Disposing of Your Business

Things may not be as rosy as you’d expect. Your business could still be showing collapse signs. Moreover, you may be physically, emotionally, and financially drained. In such a case, you would do well to sell of the business. Before disposing it off, you need to properly manage it. This will enable you to garner more money than you would if you had sold it when it was deep in crisis.    

Occasionally, your small business enterprise will hit turbulent waters by recording dwindling returns. Such circumstances call for your concerted efforts so as to identify culprit loopholes and repair them, thereby facilitating business turnaround. This repair seeks to achieve business transformation. To carry out this undertaking, you need to be logical, factual, and systematic. These measures are collectively referred to as the turnaround procedure. The turnaround strategy is a crucial part of this process. The first step involves stabilising your business’ operations so as to clearly and correctly pinpoint the thorny items that require mitigation. Through the use of information gained from relevant risk management firms, you then detect your enterprise’s weak spots. You will need to compare your business’ performance with those of peers within your industry. This step is succeeded by careful reorganisation of your business model so as to address the challenging issues. You then develop a turnaround plan and go through it with a select group of pertinent creditors. Your execution of the agreed upon plan is the next step. After evaluating your business’ trends after the foregoing process, you can make an informed decision of whether to sell or continue developing the business. By following these simple steps, the question of how to turn around a business need not be daunting.

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