If your business is behind on its bills and cash keeps running short, you have probably heard the phrase turnaround management. It is a series of strategic steps that aim to salvage what you have left of your business and turn it around, as the name implies. But is it right for you? Let’s take a look. While many businesses go bankrupt, it isn’t because of a single mistake that costs them everything. There is always a process, an accumulation of decisions and missteps that grow into a situation that almost none of the owners want. Some blame the economy. Some blame their managers. Whatever the cause, the fix starts with cash.
At its core, turnaround management is about money. It involves looking at the current state of your business’s financials, restructuring debt and finding a new way to manage cash flow so that you can continue to pay your operating expenses. It may sound obvious, but the more cash you have, the more freedom you have to make your turnaround work. Every part of your turnaround plan should include how it will affect cash flow. A business owner should look at a business’s cash flows before, during and after their turnaround. Each stage involves reviewing the company’s cash flows to assess how well it is doing and what can be done to improve it. A solid understanding of cash inflow and outflow is critical in managing all business growth and turnaround efforts.
Key Warning Signs
So how do you know whether your business needs it? Start with the books. A few key warning signs are:
- an increase in accounts payable;
- a significant decline in cash flow;
- a near-term debt obligation that still hasn’t been met; and
- a large contingent liability.
A lot may be right about your company, but if your cash flow is bad, is crumbling, or doesn’t exist at all, you may be headed down the road to bankruptcy. Once those issues show up, you have to act fast on working capital. The sooner you move, the better your odds of turning the business around. A successful turnaround plan can get your business safely across a financial bridge from a marginal state to a healthy one.
Make the Plan Early in the Process
If you make the plan early in the process, you’re more likely to be successful. It’s tough to be objective about your own business’ assets, expenses and cash flow, so many entrepreneurs rely on outside advisors to review the situation with a fresh eye. What you really need is an outside opinion that is not clouded by the things we know can cloud our judgment - emotion. Emotion is the number one enemy of a turnaround.
Now that you’ve identified the issues, it’s time to create a comprehensive strategy and start implementing it quickly. Create specific benchmarks to measure success. Think of it like a roadmap: it outlines your next steps, who needs to be involved, and the timing for each step, so everyone involved is on the same page about the details. Make sure everyone in the company knows what’s changing and why. Stakeholders need a unified plan so that everyone is working as one cohesive company. The turnaround plan should support your people, not attack them.
Financial Tools
In most turnarounds, three moves do the most good: eliminating unprofitable assets, managing debt and increasing working capital. Determine which assets the business wants to keep so it can decide which ones they don’t need. Once you know where the money is going, it’s time to prioritize where the money needs to be going. Without sufficient cash flow to operate the business, you are rolling a boat up the beach without enough water to let it float. Some financial tools can simultaneously affect more than one area at a time. For example, refinancing your debt can reduce monthly payments and free up working capital. Here are four others worth knowing about.
The first is factoring. Factoring is when a business sells its accounts receivables (as in money that is owed to it by its customers) to a third-party (a factor) to get a cash advance. The factor then collects the debt from the receivable. You are able to sell not just invoices but also purchase orders and contracts to your factor. From there, the factor (the company that buys your receivables) collects the money, takes a fee and sends you the rest. Factoring can be a great solution when you have several clients with unpaid invoices, clients who have a history of slow payment, or an industry with long payment terms. It’s also useful if you need to buy material for orders based on cash from clients, have contracts with dependable clients who pay on time, or want to avoid taking on more debt. Factoring provides a way for companies to bridge the gap between selling their products and receiving cash.
The second is a line of credit. A line of credit is a flexible source of capital that a company can draw on as it needs, like a credit card. You only pay interest on what you borrow - if you don’t borrow a cent, you don’t pay a cent in interest. That’s a great emergency backup plan! With a seasonal business, your sales will vary, but you still have expenses that need to be paid every month. You also have loans and other debts that you pay on a regular schedule. A business line of credit allows you to get money, pay off your debts, and then repay the loan as your revenues come back in. Use a line of credit if you need cash in a hurry, want money for special orders or customer requests, and don’t want to take on long-term debt.
The third is a sale-leaseback. A sale-leaseback can be attractive for businesses that rely on expensive equipment. You sell the asset, get a lump sum for working capital, but continue using the equipment by leasing it back. You pay the new owner a monthly fee, and when the lease ends, you may have the option to buy it back, renew, or walk away. If you depend on tractors, commercial ovens, printing presses, or similar heavy-duty machines - and you prefer not to deal with upgrades or maintenance - a sale-leaseback may be worth a look. The biggest advantage of a sale-leaseback is a big, immediate cash increase. The lease prevents disruption and allows your workers to continue operating efficiently.
The fourth is the SBA 7(a) loan. The SBA 7(a) is one of the Small Business Administration’s most popular business loans. It can be used to purchase real estate, equipment, and construction, and to refinance debt. It’s one of the few SBA loans that can be used for working capital. Working capital buys time and flexibility. It can help you keep the business operating while you restructure your finances. If you meet the eligibility requirements, you can apply through a private lender. This loan program is a good option for you if you’ve been denied financing in the past, the company is a for-profit business with a net worth of $15 million or less, you need the money for day-to-day operational expenses, such as payroll, supplies, utilities and rent, and you don’t want to tie yourself to a long-term repayment plan.
In the end, the options presented here for acquiring working capital can carry your business through the transition. But the new money has to be used efficiently, which means that before you even consider applying for financing, you should have a plan in place that takes a whack at the problem areas and lets you know how much money you need to repair them.
So does your small business need turnaround management in 2026? If the warning signs above look familiar, the answer is probably yes. It doesn’t mean you are at the end of the road, but it means it’s time to execute a turnaround plan. There’s really no such thing as a perfect turnaround plan. The one you start early has the best chance of working.
