07 August 2009

How to spot the signs of trouble and get a company into turnaround before it’s too late

It’s a sobering thought that of the 10,000 to 14,000 Australian companies likely to become insolvent in 2009 in the midst of the global financial crisis, a significant number could have been saved if they had sought the right help early enough.

In many cases, the businesses that end up in receivership have not heeded early warning signs and sought the right assistance at the appropriate time.

In Australia there is a limited but growing pool of specialist turnaround management expertise. A growth industry filling an in-demand niche, specialist turnaround advisors are the advisors companies are turning to so they don’t end up having to deal with insolvency practitioners.

Turnaround experts do not just work with businesses in trouble. Many clients seek their advice for general profit improvement.

Is it too late to turn things around?
The good news is that if you put your hand up for the right sort of help early enough, it is possible to turn around many of the danger situations companies can find themselves in.

Companies must be willing to admit they need help. The earlier we get engaged, the more options we have to restructure the business.

The three key elements of any turnaround are financial restructuring, operational restructuring and stakeholder management.

A turnaround practitioner will use skills in insolvency/corporate finance/audit; management consulting/CFO; project management; negotiation & stakeholder management; HR skills; financial modelling; as well as lateral thinking ability and the ability to stay calm under pressure.

The key is to critically assess the troubled entity’s business plan and review profit and loss to determine the causes of underperformance such as rising production costs, loss of customers or increased competition.

Timing is crucial when a company is underperforming. Turnaround specialists create and implement rolling 100 day work plans detailing the key initiatives being targeted to improve business performance and ensure that the initiatives are implemented in a timely, efficient manner.

The work focuses around improving cash flow, stabilizing operations, communicating with key stakeholders to re-build their support, exploring all strategic options and developing a comprehensive turnaround strategy.

The turnaround specialist will undertake strategic, financial and operational reviews to identify areas of underperformance and then work with management to implement strategies to improve the overall performance of the business.

It is not unusual for the turnaround expert to turn to their extensive network of financiers and private equity firms to introduce the right combination of debt and/or equity to fund the troubled business.

Warning signs to look for
While the ways companies can get into trouble are many, there are common themes.

These include when management has been too focused on growing revenue without considering the impact on margins and profit; if businesses don’t have the right systems and controls in place to manage their working capital; or if businesses don’t have the right management team depth of skill and don’t review financial and operational performance regularly.

The key signs that should start senior management’s alarm bells ringing are:

 Actual/potential bank covenant breaches
 Working capital growth outstripping revenue growth
 Profit warnings/missing forecasts/declining margins
 General industry downturn or industry consolidation
 Loss of key management personnel or increase in staff turnover
 Difficulty in obtaining general finance
 Management “buying” sales at the expense of margin
 Creditor or debtor ageing issues
 Competitor risk
 ATO and Super arrears
 Loss of a major customer
 Post merger integration issues

Cash flow is key
Any improvement in working capital – the amount of cash tied up in accounts receivable, inventory and accounts payable - is beneficial, especially in current deteriorated market conditions.

Extra capital can be used to pay down debt, fund capital expenditure, satisfy seasonal cash requirements or further invest in growth initiatives such as research and development.

For specialist performance improvement and turnaround management firms, the aim is to deliver strategies which rapidly improve profitability and cash flow. To do this, we need to know what drives their business, how to achieve above industry benchmarks and more importantly implement strategies that increase the financial performance and value of their business.

The following is a summary of the 6 essential elements required (in our view) to achieve a successful turnaround.

1. Ability to prove business viability by demonstrating the various initiatives that will restore earnings and cash flow
2. Ability to manage “all” key stakeholders and keep them all moving in the right direction
3. Credible management which might mean making certain replacements to bolster the credibility of management
4. An ability to maintain or enhance the reputation of the business
5. An ability maintain supplier credit and terms
6. An ability to release internal working capital and secure external funding

CASE STUDY – Project Bumper

Background

This well established manufacturing business with a blue chip client base had grown by 93% over 3 years to reach an annual revenue of $46M. Unfortunately, management had not implemented sufficient controls and management skill to maintain control of this growth culminating in a loss of $4.4M for financial year 2008.

Key issues

 Poor working capital management
 No visibility on product & customer profitability
 Refinance not an option
 Lack of management depth
 Core business still viable
 84% staff turnover
 Business requires additional working capital

Major Initiatives

 100 Day Work Plan incorporating 55 initiatives to stabilise the business
 Implemented a robust cash flow and earnings forecasting system
 Implemented a working capital management program to improve cash flow
 Undertook a capital raising process
 Implemented price increases ranging from 6% - 18%
 Recruited a new CFO, HR and Supply Chain Manager to bolster management
 Implemented a staff retention strategy
 Aggressively managed the many stakeholders
 Implemented a round of redundancies

Outcome

 Crisis averted
 $3M in financial support
 Conversion of $2M of debt to equity
 Stakeholder relationships restored
 Staff turnover down to 30% from 84%
 FY09 H1 Profit of $0.3M (versus a $4.4M loss for the previous year)
 10% reduction in workforce

Breakout box: How to effectively “stress test” your business
Turnaround specialists Vantage Performance are regularly seeing evidence of companies being sideswiped by major changes to their business. We recommend that all organisations should be placing a focus on stress testing their business whether they are in trouble or not.
Given tough and fast-changing economic times, it’s essential to be undertaking detailed financial modelling and "what if" scenario testing to gauge how various sudden changes in market conditions will affect your business and more importantly, what initiatives management can deploy to combat these challenges.

At Vantage Performance, these are the key questions we ask clients to answer when they want to “stress test” their business:

1. What is the new breakeven level for the business and how does it change from the previous level?
2. What is the impact on revenue and earnings if you lost a major customer?
3. If customers are demanding lower prices, what is your tipping point and are you prepared to lose customers in order to maintain earnings? What changes will you need to make to your cost base to match the new lower revenue base?
4. How is cash flow impacted if debtors take an extra 10 days on average to settle their accounts?
5. Could there be a breach of banking covenants and if so, how will you respond to your financiers concerns?
6. What changes will you require to your banking facilities and what would be your banks attitude to an increase in lending, if required?
7. Are staff cuts needed and how will you deal with this (4 day work week, pay reductions, retrenchments)? Do you have the cash flow to fund redundancies?
8. What overheads will you reduce and what capex plans need to go on hold to preserve cash?
9. What non-core assets could be sold to reduce debt/provide additional cash flow?
10. Are sales or production levels too low to remain viable and is a merger/strategic partnership needed to maintain critical mass? Who would you approach?
11. What plans do you have to meet ATO requests?

Our Vantage Performance team is looking forward to interacting with you again.

Regards,

Michael Fingland
Managing Director

Vantage Performance Team
Profit Improvement and Turnaround Specialists
www.vantageperformance.com.au

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1 comment:

~~~**diya_the great said...

the post is related to an important business issue, I liked the corporate turnaround management. I would be looking forward for further related posts.