David Graham, Partner, RiVO Partners LLP suggests the current economic crisis puts additional pressures on already struggling companies.  How do stakeholders determine whether to bring in external help? 

And, if so, when?
Ask any seasoned Interim or Turnaround Manager why distress is painful:  simply put, there’s a huge amount to do, inadequate and/or insufficient resources and time available, and frequently people are focused on doing things that are not top priority.  Early challenges include:  getting a clear understanding of the situation;  managing customer and supplier expectations;  understanding how long things have been deteriorating;  discovering what has prompted action now;  and gently challenging assumptions in the brief!

Probe deeper and ask why things don’t always go smoothly once the agenda is set.  Even then, denial, prevarication or obstruction by or between the stakeholders can easily constrain the speed with which the turnaround can be started, let alone executed … … and that assumes that taking modest risks is not restricted by an urgent need to operate within tight banking covenants and closely-monitored headroom. 

This results in more pain
Given a situation with many of these factors, the number of issues compounds; and, unless they have had prior experience of a distressed situation, few stakeholders understand how rapidly deterioration can accelerate with the passage of time.

As a company’s fortunes begin to decline, so do performance drivers: typically morale worsens, staff and management turnover increases, customer service levels decrease, operational issues emerge, levels of profitability become unacceptable, cash becomes scarce and working capital requirements increase.  In severe cases, products may become uncompetitive or obsolete due to lack of investment, key customers and contracts may be lost, and key suppliers may withhold supplies, or move swiftly from standard payment terms to cash-with-order.  Cash flow starts to run the business, confidence levels are shaken and relationships with creditors and backers alike can become adversarial.

Unless assertive, operational action is taken very quickly, reinforced by solid financial backing, control of the business may well be wrested away from the directors and the value of returns to the stakeholders will decline rapidly. 

…and here’s an example:

A private-equity-backed national wholesaler had failed to deliver the expected synergies from a recent merger.  A new CEO was appointed to stabilise and regenerate the business and an Interim CFO was recruited, initially for a 3-6 month period.

• First priorities:  close the accounts for the previous year, introduce cash forecasting and management disciplines, and provide support to accountants performing an Independent Business Review.
• During the first 3 months, the CFO uncovered a £2.7m black hole in net current assets, an undisclosed long-term liability of about £20m and significant record integrity issues.  Furthermore, his assessment of the break-up value of the business showed that the positions of the stakeholders were under water.
• A new business plan was prepared which won an injection of fresh equity, and the backing of the lenders conditional upon improved cash forecasting and strict adherence to facility headroom limits. 
• A second refinancing round further strengthened the balance sheet.  However, this was insufficient to prevent credit insurers withdrawing cover from the group.  The CFO subsequently negotiated self-insured trade terms with leading suppliers in order to ensure orderly trading continued.

The final outcome was highly successful, but the Interim CFO’s assignment, along with a return to profitable trading, had taken 25 months.

A less painful approach to distress
If you think you’re doing everything right, but the numbers don’t reflect that, go back to basics.  Double-check all operational and financial statistics and their interdependence.

If the numbers are still not right, or if things are starting to go badly wrong, why not bring in a Turnaround Manager or an Interim to help stabilise the situation?  As with any walk of life, there are times when it pays to seek out specialist help from someone whose training and experience equips them to work well in a specific field: they will almost always outperform those for whom this is uncharted territory.

…which is helped by…
Interims and Turnaround Managers have the added advantage of not being wed to any of the historical mental frames that inhabit most businesses.  Their focus is on a successful outcome for the company or the stakeholders, so they are not necessarily bound to existing strategies or emotional ties.  They are often able to ask pertinent questions based on their experience which may help to identify disconnects between the activity and the reported data.

…and here’s an example:
The MD of an online retailer saw a significant reduction in sales volumes.  He identified threats to profitability and liquidity.  Had the trend continued the business would have been at risk, so he approached a Turnaround Practitioner.

Together, their analysis of the business showed the product range had been extended too far, contributing to cash flow difficulties and depressing profit margins. 

Product lines were rationalised in order to remove unprofitable or slow-moving items.  More realistic assessments of future business were made and headcount was adjusted.  Only one round of redundancies was necessary, helping the company get into recovery mode more quickly and reducing uncertainty amongst employees.  A more responsive and cost-effective automated web platform was introduced and advertising agreements were improved.  Improved planning reduced inventory and eased the cash situation, whilst further strategic and tactical improvements were also implemented.

This allowed the business to trade profitably and positioned it well to capture market share when the economy rebounds.

Spot the difference!
In both cases above, difficulties were successfully overcome.  However in the second example, management took proactive steps to deal with a situation before it started losing control, and the turnaround in performance was more structured and far-reaching.  Because the business was proactive in its attitude all effort was spent on improvement, rather than on overcoming inertia or denial.

Lessons to remember
What you see in the numbers may not always reflect reality.   There is merit in having an experienced eye look over the financial reporting process, and in particular marrying short-term cash forecasts with medium-term sales and margin ambitions.

Turnaround specialists tend to have well-honed antennae which help them identify the true root-causes of a firm’s difficulties, and they bring broad experience, objectivity, lateral thinking, common sense, the courage to speak their mind and a willingness to act on their own initiative.  Their skill is knowing what is going to make the most impact . . . then getting on with it.

It takes courage for an executive board to call for help from an external source – - sometimes they need to be prompted to do so by other stakeholders – - but the earlier that operational and financial difficulties are recognised and an Interim or Turnaround Manager is engaged, the better are the chances of survival.

David Graham is a Partner in RiVO Partners LLP, which specialises in turnaround & performance improvement for mid-market companies. 
Mobile: +44 (0)7887 757178

www.rivopartners.com