Turnaround management is a process used to help businesses facing crisis, decline or recovery. Usually this process is led by a turnaround consultant or turnaround manager. Turnaround managers are trained to understand how to restore operations and rework the balance sheet so that the business can return to profitability.
There’s no shame in needing a turnaround manager. In fact, lots of well-respected companies have gone through turnarounds, including Apple, Federal Express, Airbnb and Starbucks.
How does turnaround management actually work in real life? Here are the key things to know.
Needs a Turnaround Manager
A company typically needs a turnaround manager as it nears insolvency, which can take two forms: cash flow insolvency (when a company cannot pay debts as they come due) and balance sheet insolvency (when a company’s liabilities are greater than its assets).
Cash flow insolvency: If a cash crunch happens occasionally, it’s probably not a problem. But if your cash flow shortfall is serious or lasts a long time, it may mean you need to bring in a turnaround manager.
Balance sheet insolvency: This kind is harder to measure, and its warning signs are less obvious than those for cash flow insolvency. If your liabilities exceed your assets at fair market value, you may need to call in a turnaround manager who can restructure loans, trade payables and other obligations when no other capital is available.
Creditors often point out the need for a turnaround manager. In some cases, a creditor will require that a turnaround manager be brought in as a condition of forbearance. It’s natural to feel embarrassed about needing help, but it’s better to bring a turnaround manager on board sooner rather than later. If you wait too long to bring in a turnaround manager, you risk narrowing your options.
Two Categories: Operational and Financial
Turnarounds can be broadly split into two categories: operational and financial.
Operational turnarounds target inefficient practices that result in cash shortages or losses. Sometimes operational inefficiencies develop when there are too many layers of management. You may be pricing your products badly, or your costs aren’t adjusted as the market shifts.
That’s where a turnaround manager steps in. They’ll find the operational inefficiencies and plan for how to correct them. Usually a turnaround manager is made an officer of the company and given the authority to make the hard decisions.
A financial turnaround, sometimes called a financial restructuring, tackles the company’s balance sheet. That may mean you consolidate debt, sell nonperforming assets, drop unprofitable divisions and negotiate better terms with creditors. In extreme cases, your turnaround manager may recommend liquidating the company for the benefit of creditors.
Three Phases
Whether the turnaround is operational, financial or both, the process typically goes through three phases.
First, the turnaround manager must diagnose the problem and figure out how to turn things around. Typically this happens at the very start of the turnaround process, often before the manager is formally hired.
What is really causing the trouble?
Is the problem short-lived or lasting?
How serious is it?
Diagnosis must be based on a solid information foundation. Such things as profit-and-loss statements, balance sheets, aging schedules for payables and receivables and inventory reports provide the information a turnaround manager needs. Companies facing hard times often have out-of-date reports or sloppy information, but accurate information is critical for making good decisions.
A good turnaround manager also asks whether operations can be fixed and made profitable. The answer isn’t always yes. Blockbuster was doomed when Netflix came along. However, a turnaround manager can fix operations by cutting excess operating expenses and selling nonperforming assets. That’s what Apple did, in part.
Next, the turnaround manager develops a plan of action. Most of the work goes into evaluating the options and figuring out how they will play out financially. Financial models are built for each alternative, and then a plan is proposed to management, the board, creditors and employees.
The third phase, carrying out the plan, is harder than it sounds. Once it is agreed upon, the manager either carries it out as an officer of the company or empowers and oversees the people doing it. Either way, they are accountable for getting the job done. In the best-case scenario, the turnaround plan works with no hitches. But that rarely happens. Plans and predictions are inherently flawed and have to be adjusted along the way. Meanwhile, the turnaround manager monitors progress toward the plan’s milestones and keeps all stakeholders, creditors included, informed.
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