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
07 August 2009
How to spot the signs of trouble and get a company into turnaround before it’s too late
Taking time to “stress test” your business could be the difference between survival and going under
The global financial crisis has dramatically increased the speed at which business conditions can change, forcing astute business leaders to rely more than ever on risk management strategies to protect their businesses.
Turnaround specialists Vantage Performance are regularly seeing evidence of companies being sideswiped by a major change to their business.
Vantage Performance’s managing director, Michael Fingland, said because many companies start to work on the problem after becoming aware of the results of the change, by the time they have come up with potential solutions the impact has caused serious damage to earnings, cash flow and the overall viability of the business.
“Regardless of the position your business is in, 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,” Mr Fingland said.
The key to surviving the current economic downturn
He said all organisations should be placing a focus on stress testing their business.
“It’s all about analysing base case and worst case revenue, margin and working capital scenarios in the current climate. Companies across Australia and overseas have engaged in stress testing to help them decide on a range of initiatives in case market conditions deteriorate any further,” he said.
Mr Fingland said business stress testing was an area of growth for Vantage Performance, because companies want to ensure they have a totally independent and objective view when analysing the results.
“Independence and objectivity is even more important when it comes to devising the various strategies to restore earnings and cash flow,” he said.
The benefits of stress testing include:
• Enabling a business to react quickly if conditions change suddenly
• Forcing a business to ask ‘what if' and creating strategies to deal with given scenarios to minimise risk and maximize opportunity
• Providing clarification around short to medium term capital requirements
• Placing management in a stronger position if they need to negotiate with financiers by showing they are prepared for and able to handle challenges
• Increasing the confidence of key stakeholders
• Minimising stress on the business when the tough decisions have to be made
• It will provide management with an advantage over their competitors
Mr Fingland said rigorous stress testing has enabled organisations such as Brambles and Qantas to move quickly when market conditions suddenly changed.
“When yields slumped more than expected in March 2009, Qantas quickly slashed forecasts and initiated a range of dramatic measures to reduce operational costs. It is this ability to rapidly respond to change that enables their survival,” he said.
Some of the key questions posed in an effective stress testing program include:
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 would a merger or strategic partnership be needed to maintain critical mass? Who would you approach?
11. What plans do you have to meet ATO requests.
Stress testing enables management to act nimbly when unexpected changes happen. This means that management can make prudent, sometimes lifesaving decisions very quickly.
“Those businesses that are able to adapt to change are the ones that will prosper in the future,” Mr Fingland said.
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
Global financial crisis speeds up evolution of turnaround management in Australia
Many businesses that end up in receivership could have been saved if they had heeded early warning signs and sought the right assistance at the appropriate time.
This is true at any stage of the business cycle but is a particularly powerful conundrum now in the midst of the global economic crisis.
The sobering fact is that of the 10,000 to 14,000 companies this year likely to become insolvent, a significant number of them could have been saved if they had sought the right help early enough.
Recognition of this is what is driving the growth in Australia of specialist corporate turnaround advisors. Specialist turnaround advisors sit between insolvency practitioners and management consultants/corporate financiers on the business spectrum.
While the turnaround industry is mature in the US and European markets, in Australia there is a limited but growing pool of specialist turnaround management expertise.
The Turnaround Management Association of Australia consists of professionals from various disciplines committed to assisting financially stressed or underperforming businesses. It is separate from the insolvency industry and is committed to corporate renewal and insolvency prevention.
Its members are drawn from companies that focus on pure business turnaround and profit improvement as well as from the major accountancy and insolvency practices.
Globally, the association started in the United States about 20 years ago and currently has more than 8000 members in 28 countries. The Australian chapter of the TMA launched in 2005 and has more than 200 members, making Australia the third largest chapter in the world.
While the industry is top of mind in the current economic climate for “saving” troubled businesses, turnaround experts do not just work with businesses on the brink. Many clients turn to them for general profit improvement assistance.
Don’t wait until it’s too late
Companies must be willing to admit they need help. The earlier we get engaged, the more options we have to restructure the business.
This is often difficult because human nature makes it hard for people – let alone senior business people, many of whom may have created the company in trouble – to ask for help.
But calling for expert help early enough can often prevent the heartache and headache caused by leaving it too late and ending up in insolvency proceedings.
The three key elements of any turnaround are financial restructuring, operational restructuring and stakeholder management.
A turnaround practitioner is a meld of the following skills: insolvency/corporate finance/audit; management consulting/CFO; project management; negotiation and HR skills; financial modelling and report writing; as well as lateral thinking ability and the ability to stay calm under pressure.
On engagement, a turnaround management specialist will critically assess the troubled entity’s business plan and review profit and loss to determine the causes of underperformance such as loss of customers, increased competition or rising production costs.
Turnaround specialists produce and maintain a rolling 100 day work plan which details the major initiatives being undertaken to improve business performance and ensure that the initiatives are being implemented in a timely and efficient manner.
Timing is critical when a company is underperforming.
The turnaround specialist will improve cash flow, stabilize operations, communicate with key stakeholders to re-build their support, explore all strategic options and develop a comprehensive turnaround strategy.
They will conduct strategic, financial and operational reviews to identify areas of underperformance and then assist management with executing strategies to improve the overall performance of the business.
Often they will turn to their extensive network of financiers and private equity firms to introduce the right combination of debt and/or equity to fund the business.
If steps are taken early to address the causes of underperformance then appropriate measures can be put in place to provide the best possible environment in which to develop a coordinated and achievable turnaround strategy.
Warning signs to look for
Common threads amongst troubled businesses 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.
These are some key warning signs:
Working capital growth outstripping revenue growth
Profit warnings/missing forecasts/declining margins
General industry downturn or industry consolidation
Actual/potential bank covenant breaches
Loss of key management personnel or increase in staff turnover
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
Difficulty in obtaining general finance
Improving cash flow
Working capital – the amount of cash tied up in accounts receivable, inventory and accounts payable - will be the No. 1 issue for many businesses in the months ahead as they fight deteriorating market conditions.
Any improvement in working capital is beneficial, whether the funds are used to pay down debt, fund capital expenditure, satisfy seasonal cash requirements or further invest in research and development.
Specialist performance improvement and turnaround management firms aim to deliver strategies which rapidly improve profitability and cash flow. They work with clients to identify 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.
Deterioration in accounts receivable days or stock turnover will have serious impacts on cash flow. There are always significant opportunities to improve the current level of working capital to improve cash flow.
At Vantage Performance, our experience is that a 10%-25% improvement in working capital is achievable.
Here is an example of the level of cash that can be released:
- Average Receivables $10M (55 days/sales)
- Average Payables $7M (40 days/sales)
- Average Inventories $3M
By reducing accounts receivable collections by 5 days (or only 10%) we could improve cash flow by $1million. By increasing accounts payable by only 4 days we would improve cash flow by $0.7million. By reducing stock levels by only 10%, $0.3million cash would be released.
There are a range of strategies which can be deployed to achieve these results which could result in an improvement in cash flow of $2million or more. This “released” cash could then be used for debt reduction, capex/re-investment or return to shareholders.
As a result of making the improvement this business becomes more efficient, return on capital is increased, and management’s cash flow targets are exceeded.
In our experience, a 10% improvement tends to be at the lower end of the range achieved. Some of our client businesses have generated up to 25% improvement in their working capital - equivalent to a release of up to $4.5million in the above example.
CASE STUDY – Project Jean
Background
This successful retail group had expanded too rapidly without sufficient working capital to fund this growth. Whilst management had grown the group to 12 stores the last 6 stores had incurred significant trading losses.
Key issues
• Finance covenant breaches
• Cash flow crisis
• Bank was "under water" and refinancing was not an option
• Poor working capital management
• Lack of management depth
• Core business still viable
5 Phases
• Stabilise the business
• Strategic review and turnaround plan developed
• Close unprofitable/unsustainable outlets - stakeholder negotiation was key!
• Focus on core stores and "grind it out"
• New growth after pruning
Outcome
• Cash flow crisis averted
• Stakeholder relationships restored
• Tracking 80% + increase in same store sales
• $1.1 million improvement in net profit
Potential breakout box: What a turnaround specialist does
At Vantage Performance, these are some of the typical tasks we undertake to help turn around a troubled business:
- Establish a robust rolling 13 week rolling cash flow forecast so management can truly understand how cash flows through the business and when key flash points may arise.
- Implement systems to accurately calculate product/service profitability. Raising prices or dropping unprofitable products may need to be considered.
- Develop a strategy to keep communicating with major stakeholders (bank, key suppliers, key customers, shareholders and employees.
- Develop a marketing strategy to win new customers and so decrease any customer concentration risk.
- Look at a range of initiatives to reduce costs in the business.
- Critically assess management’s strategy as we may need to fundamentally alter the structure of the business to restore viability.
- Document a strategic business plan with detailed forecasts so the troubled business can show financiers they are working to a plan. Gaining financiers’ confidence is crucial in the current market where it is harder to raise new finance.
- Review the management team to ensure the right mix of staff with appropriate skills. Consider recruiting experienced staff to plug the gaps.
- Review processes to identify areas of labour or time wastage. Is the business really getting your products and services to market as efficiently as possible?
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
Keeping your business afloat – and profitable – in tough times
Timing is critical when a business is underperforming – it can be the difference between a business going under or turning performance around.
Whether a company is underperforming, is in distress or simply facing major change, there are many challenges to be faced. Sometimes outsiders can see more clearly what is going wrong with a business than the people who are actually running it.
On a daily basis, Vantage Performance is working with clients who want to turn their businesses around. This article will share some insights into the early warning signs that we see daily in underperforming or troubled companies, and positive actions companies can take to remedy the problems.
It’s important for management not to leave it too late to ask for help – many businesses that end up in receivership could have been saved if they had heeded early warning signs and sought advice or assistance at the appropriate time.
There are common threads that emerge from businesses which get themselves into trouble. These are what we describe as internal causes of underperformance. In many cases; management have been too focused on growing revenue without considering the impact on margins and profit, businesses don’t have the right systems and controls in place to manage their working capital (businesses that are growing rapidly can quickly come unstuck if they don’t aggressively manage their debtors, stock and creditors), businesses don’t have the right depth of skill in their management team, they don’t review financial and operational performance on a regular basis and in many cases the business has outgrown its finance facilities.
There are also early warning signs, if business owners and business leaders can lift their heads up from the daily grind to notice. The following is a list of the major warning signs that management teams (and their advisors), should be alert to:
- Working capital growing faster than revenue
- Difficulty in obtaining finance
- Management “buying” sales at the expense of margin
- Loss of a key customer
- Increase in staff turnover
- Increasing creditor pressure
- Inability to pay tax and superannuation liabilities
- Impending banking covenant breaches
- General industry downturn or consolidation within the industry
The following is a summary of the major remedies to combat many of the key issues that businesses will be facing at present.
- Put in place a robust 13 week rolling cash flow so you can truly understand how cash flows through your business and when key flash points may be arising.
- Implement systems that accurately calculate the profitability of your products and/or services. For unprofitable products, raise prices or consider dropping them altogether.
- Identify slow moving or obsolete stock and be prepared to cull products that are simply not moving fast enough to warrant keeping them. Be ruthless, if the products are not moving then your customers don’t want them!
- Develop a strategy to deal with your major stakeholders (bank, key suppliers, key customers, shareholders and employees). Keep communicating!
- Develop a marketing strategy to win new customers so you can decrease any customer concentration risk you may have.
- Document a strategic business plan including detailed forecasts so you can demonstrate to your financiers that you are working to a plan. This will increase or maintain their confidence which is crucial at present when it is harder to raise new finance.
- Review your management team, do you have the right mix of staff with appropriate skills? If not, decide if the existing team can rise to the challenge with additional training and mentoring. If you are not confident don’t waste time hoping that will someday, consider recruiting experienced staff to plug the gaps.
- Conduct a review of your processes to identify any areas of labour or time wastage. Are you really getting your products and services to market as efficiently as possible?
- Consider engaging a specialist business turnaround firm like Vantage Performance to project manage many of these strategies so that management can stay focused on the core business.
Working Capital – the amount of cash tied up in accounts receivable, inventory and accounts payable will be the No. 1 issue for many businesses in the months ahead as they fight deteriorating market conditions. Given that working capital and cash flow is such a critical issue for many businesses at the moment we have explored the area in more detail below.
Any improvement in working capital is beneficial, whether the funds are used to pay down debt, fund capital expenditure, satisfy seasonal cash flow requirements or further invest in research and development.
Whilst it will be critical to keep a tight control on working capital, as a deterioration in accounts receivable days or stock turnover will have serious impacts on cash flow, there are always significant opportunities to improve the current level of working capital to improve cash flow.
The following is an example of the level of cash that can be released:
- Average Receivables $10M (55 days/sales)
- Average Payables $7M (40 days/sales)
- Average Inventories $3M
By reducing accounts receivable collections by 5 days (or only 10%) we could improve cash flow by $1M. By increasing accounts payable by only 4 days we would improve cash flow by $0.7M. By reducing stock levels by only 10%, $0.3M cash would be released.
There are a range of strategies which can be deployed to achieve these results which could result in an improvement in cash flow of $2M or more. This “released” cash could then be used for debt reduction, capex/re-investment or return to shareholders.
As a result of making the improvement this business becomes more efficient, return on capital is increased, and management’s cash flow targets are exceeded.
In our experience in running Working Capital Optimisation programs in a range of different businesses shows that a 10% improvement tends to be at the lower end of the range achieved. Some of our client businesses have generated up to 25% improvement in their working capital - equivalent to a release of up to $4.5M in the above example.
As a business process, working capital is driven by an interlinked series of activities we refer to as a working capital chain (purchasing stock, manufacturing goods, selling the goods, and collecting and making payments etc.)
Working Capital Optimisation uses what we call a holistic approach – exploring the processes along the chain and improving the management of working capital from end-to-end by working with the key people who drive it to enable them to discover improvements.
The key features of this process are:
- it involves the people driving the working capital chain;
- it raises their awareness of the value of time in relation to working capital;
- it shows them the processes they are involved in and how they are performing financially;
- it provides a structure within which they can identify and explore problems and opportunities;
- it enables them to discover how to change permanently what they are doing in order to release cash, both through improvements in internal processes and through changes in the way they trade externally;
- and, crucially, it motivates them to implement those changes.
Improving working capital management by as little as 10% can generate significant cash flow, and this is possible even when no obvious working capital problem exists.
CASE STUDY - Brisbane Concrete Pumping Group
Background
Queensland’s largest concrete pumping business, with a blue chip client base and 80 employees, found itself struggling under bank debt of $22 million. For the past two years they had reported trading losses and the loss for financial year 2008 was about $2 million. BCP appointed Vantage Performance in October 2008 after the business had been placed in Receivership and Voluntary Administration.
Key issues
• Group was in Receivership and Voluntary Administration
• Refinance was not an option
• Group was over geared
• Lack of management depth
• Poor working capital management
• Additional working capital required
• Major debt reduction required
• Core business still viable
Key Initiatives
• 13 week cash flow and detailed integrated forecasts
• Capital raising
• New management team
• Restore stakeholder support
• Produce strategic business plan and Deed of Company Arrangement proposal
• Negotiate with Receivers, Voluntary Administrators, creditors, and all 8 financiers
Outcome
• Proposal was approved by 100% of creditors
• $2M injection of working capital
• Bank facilities restructured
• Material reduction in bank debt
• Stakeholder relationships restored
• Conclusion of Receivership and Voluntary Administration
• Control returned to directors in mid January 2009
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 of product & customer profitability
• Refinance not an option
• Lack of management depth
• Core business still viable
• 80% staff turnover
• Business requires additional working capital
Key Initiatives
• 13 week cash flow and detailed integrated forecasts
• Price increases 6% - 22%
• Capital raising
• New CFO, HR Manager and Supply Chain Manager
• Stakeholder communication strategy
• Employee retention strategy
• Cost reduction (direct and indirect)
• Sale of non-core assets
Outcome
• $3.1M in financial support
• Conversion of $2M of debt to equity
• Stakeholder relationships restored
• Staff turnover down to 32% (in 10 mths)
• July to December 2008 profit of $0.3M (versus a $4.4M loss for financial year 2008)
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
The 6 essential elements in turning around a troubled business
With fallout from the global economic crisis still biting, increasing numbers of Australian businesses are feeling the pinch.
Michael Fingland is a director of the Australian Turnaround Management Association and managing director of leading turnaround management consultancy Vantage Performance. He can share his expertise on what are the 6 essential elements in turning around a business that is in trouble or senses trouble ahead.
These 6 elements are:
Ability to prove business viability
Ability to manage key stakeholders
Management credibility
Business reputation
Maintaining supplier credit
Securing internal and external funding
Some businesses are unsure whether they need turnaround management, others find their company’s problems too hard to face and leave it too late, often ending in insolvency. So how do you know when to call for help? The key warning signs to call in a turnaround management specialist are:
If you are struggling to refinance or raise additional finance
If you are experiencing a material decline in sales and/or margins
If you have or are likely to breach your banking covenants
If the company has been placed in Voluntary Administration or Receivership (as turnaround managers can work with the directors to structure a rescue plan)
If cash flow is becoming harder to manage
If you have ATO or superannuation arrears
If creditor pressure is building
If you have lost a major customer
If you are experiencing an increase in turnover at the senior management level
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
BRW Magazine
1. Every business is different; every economic downturn has its own characteristics. But are there common warnings for a business that might be facing insolvency, or at least the threat of financial crisis?
The following is a list of the typical warning signs for a business that may be facing cash flow issues or insolvency:
- Declining margins; increasing creditor pressure; profit warnings; overdue ATO and superannuation; increase in staff turnover; resignation of key management staff; banking covenant breaches; difficulty in obtaining new finance; creditors putting the company on stop supply or cash only purchases.
2. In the very early stages, are there any tried and proven methods for trying to reverse the progression towards insolvency before it actually occurs?
The following is a list of some initial strategies that can be put in place to stabilize the business
- Implement a rolling 13 week cash flow so you can understand if there are any key flashpoints on the horizon
- Implement a working capital reduction program
- Review the margins of the major products and services and if the margins are not sufficient on certain items be prepared to put the prices up at the risk of losing volume
- Look for wastage in the business (ie. inefficiencies in the production system) and ways to improve productivity
- Implement an employee culture program as this will deliver significant productivity and customer service benefits
- Implementing a debtor finance facility can be used to release the cash tied up in the debtor book which can be used to reduce bank debt or trade creditors
3. What are the key elements required to turn a business around? (sound management, good product)?
The following are the six key areas required in order to achieve a successful turnaround:
a. Proving business viability
a. Management and their advisors need to be able to demonstrate a business plan supported by detailed financial forecasts which clearly demonstrate the major changes they will implement in order to maintain or restore viability. The key focus needs to be on the assumptions going forward and how each initiative will impact on sales, margins, net profit, cash flow and the finance facilities. Typically this is where a number of businesses get it wrong as they don’t know or understand how to “package” the information in a way to provide clarity to the many stakeholders.
b. Maintaining business reputation
a. Management must have a strategy for maintaining the goodwill inherent in the business. A strategic review will determine whether it is customer sales, product or service quality which is the main issue of concern and that will help guide the management team on what strategies to implement to ensure the businesses good name is kept intact.
c. Credible management
a. Typically, to restore the confidence in the major stakeholders some changes will need to be made in the senior management team. Either to replace certain key roles due to underperformance or to bolster the team to provide additional experience in managing the business through a turnaround as most management teams will not have the experience in leading the business through such a process.
d. Ability to maintain supplier terms
a. It is critical to ensure ongoing supply and to minimize supply disruptions as any decrease in production etc will have an immediate impact on sales and then future cash flow. Management will need to negotiate with their key suppliers to ensure they have confidence in the turnaround plan and are comfortable with the new terms being offered by management to ease pressure on the business. If more favourable terms are agreed to with the major creditors (which will provide cash flow support) management must demonstrate when these “special” terms will be able to be dissolved and revert back to normal commercial terms.
e. Ability to source external funds
a. A key component of any turnaround is securing both internal and external sources of working capital to fund the business through the major period of change. Internal sources relates to the “lazy” working capital tied up in the business that can be released for cash flow. This relates to the amount of cash tied up in debtors, stock and creditors. There are a range of initiatives which can be implemented to release cash from these areas which can be used for paying overdue creditors, paying down debt or capex etc.
f. Understanding the agenda of the key stakeholders
a. It is important to understand the agenda of all key stakeholders and to understand who exactly they are. They comprise the financiers, shareholders, employees, creditors, unions, and government. Each stakeholder group has their own agenda and it is important when formulating and selling the strategy that you have catered for each class.
4. After a successful turnaround, what will be different in the business? Importantly, what should be different?
- A renewed focus on profit and cash flow, not sales volume.
- A big focus on improved communication across all levels of the business.
- A better informed and engaged group of stakeholders
- Improve employee morale and culture
- Reduced debt levels
- Essentially, much less stress on the business
5. When is it the right time to pull the plug? When is it the right time to pursue rescue?
- The time to realize that the turnaround may not succeed is when you form the view that the six key areas identified in point 3 are no longer achievable. If this is the case then it may be possible to continue the restructure via a Voluntary Administration process.
Our Vantage Performance team is looking forward to interacting with you again.
Regards,
Michael Fingland
Managing Director
Vantage Performance Team
Profit Improvement & Turnaround Specialists
www.vantageperformance.com.au
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