Righting the Ship – The Four Phases of a Financial Turnaround Strategy
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When a business slides towards insolvency, anxiety and panic can overwhelm a business leader and hinder their ability to correct the situation. However, concise planning and decisive action can turn the business around if a cooler head prevails.
Businesses typically follow a defined life cycle from start-up to growth and maturity, then renewal or decline. This path is not always linear, and sometimes it can include a stormy ride of profitability, dipping into poor performance and back again as waves of market conditions change. Experienced business owners learn to ride the worst of these storms without crashing. They accomplish this by following proven turnaround strategies that have passed the test of time.
If stormy conditions endanger your company, learn how to right the ship by following the four phases of a financial turnaround strategy.
The importance of financial turnaround strategies
In most cases, the first thing many business owners do when their business slides toward insolvency is to cut costs. But this tactic will only slow the inevitable if not backed up with coordinated corrective actions. Ultimately, you breathe new life into your struggling business by implementing a focused financial recovery plan.
Turnaround recovery strategies include a range of measures companies employ to recover from a period of performance decline. The period of decline and recovery in performance is called the turnaround and is measured based on net income.
A turnaround strategy can be organized into four stages to reorganize and revitalize a struggling business. If planned and implemented well, a turnaround strategy can help companies facing pressing challenges reinvent themselves and stay relevant regardless of market conditions.
What are the four stages of a turnaround strategy?
The core objective of a turnaround strategy is to stop a business’s downward spiral and restore financial health. This process can be organized into the following four stages:
Stage 1: Assessment and Diagnosis
The sooner you react to diminishing financial performance metrics, the better! Regularly review monthly financial statements and reports, plus monitor financial ratio trends to determine the trajectory of your business. Be objective in your assessment: if the business’s financial metrics are slipping into dangerous territory, take immediate action. Conduct internal audits to assess operational efficiencies, identify underlying issues and expose root causes. Examine all aspects of the business and crunch the numbers to determine if your business model is still viable and if so, what actions are needed to restore profitability.
Stage 2: Strategy and Planning
Next, develop a business turnaround plan. The plan aims to set strategies designed to reorganize and revitalize the organization and restore the business to financial health. It details changes to how you conduct your core business, identifies new sales initiatives, outlines staff reductions, and records cost-saving actions. It should include a cash budget and a set of monthly financial projections with objectives indicating how you intend to get out of your situation in measurable terms.
The following are main elements of a turnaround plan:
Crisis Stabilization: The first task is to conserve cash in the short term and rebuild stakeholder confidence by demonstrating that senior management has taken control of the situation. Restructure finances by decreasing costs and short-term expenditures to relieve financial stress and keep up with payment obligations. Start aggressive cash management to reintroduce predictability into business operations.
Improved Leadership: Reorganize the management team to overcome dangerous gaps in senior management’s experience and skills.
Strategic Focus: Redefine the core activities of your business, divestment, M&A, and restructuring to better align with current market conditions.
Organizational change: Identify required changes to improve efficiencies, boost employees’ morale, strengthen communications, etc.
Improving the Process: Adjust the company’s operations to address the main risks and barriers to profitability.
Restructuring Finances: Focus on cash monitoring, tighter controls, equity, securing short-term funds, selling underutilized assets, and generating improved cash flow.
Your turnaround plan serves as a roadmap to save your business. It also convinces stakeholders that the business remains viable and can return to profitability.
All the information you need to make the right decisions regarding your business can be found in your financial documents. These will give you financial insights and foresight to make the right daily decisions. But be cautious – knowing how to interpret and analyze lag measures to project the results of operational changes is a task best left to skilled business advisers. Consult with experienced turnaround consultants to build a viable turnaround plan that’s most likely to succeed.
Stage 3: Execution and Implementation
The next step is to get everybody on board – an “all hands-on deck” mentality ensures maximum team buy-in. Communicating the turnaround plan to all stakeholders, including employees, customers, suppliers, and investors helps build support and commitment to the plan.
Monitor progress regularly and adjust as needed to stay on track and ensure the turnaround plan achieves its goals. This may require ongoing market analysis, regular competitive research, and continuous internal business operations monitoring.
Stage 4: Stabilization and Growth
The end goal is to stabilize operations while preserving the value of the business and protecting stakeholders. Now is the time to institutionalize changes in corporate culture to emphasize profitability, ROI, and return on assets employed. Build continuous management and employee training and development programs to raise the caliber of your human capital.
Most importantly, seek opportunities for profitable growth. Build on competitive strengths and formalize a flexible financial structure that supports business expansion.
How to transition to a more flexible financial structure?
Conventional business financing, such as a bank loan or operating line of credit, is typically difficult to qualify for and can take months to arrange. Businesses that utilize conventional financing options are subject to heavy lender oversight and debt covenants that often restrict the company’s ability to stretch finances to support turnaround plans. Traditional financing options often limit, rather than fuel, business recovery.
Alternative finance companies take an entirely different approach to business financing by offering flexible funding solutions that are easier and quicker to acquire. Qualification requirements are based on the quality of assets the business possesses. Suppose the company has accounts receivable from creditworthy customers, or equity in inventory, machinery, or equipment. In that case, it is well-positioned to obtain invoice factoring, asset-based lending, or a number of other financing solutions.
Leading alternative lenders provide cash flow and working capital solutions with minimal lender oversight and few covenants to provide greater financial flexibility. Borrowers can leverage asset strengths to maximize credit and gain access to more capital in more ways than conventional lenders are willing to provide. In addition, alternative lenders allow for credit limits to expand to better support your recovery.
The best alternative lenders are experienced in dealing with businesses in distress and working with banks, and other conventional lenders, to facilitate a smooth and seamless transition of accounts. If your business needs flexible business financing options to support a turnaround plan, research leading alternative lenders with experience in your industry. These lenders will help to ensure a smooth transition to a flexible financial structure without funding gaps.
Conclusion
A turnaround plan is designed to take a struggling business from distress to financial stability.
A turnaround plan should be in place and initiated within one to two quarters. Behavior and operating change should be evident to employees, customers, and shareholders within two to three quarters, improving morale and confidence. Within three to four quarters, operating fundamentals should show marked improvement. Results are measured in net income or net profit. 20% is considered good, 10% average or standard, and 5% is considered low or poor.
The success of a turnaround plan is dependent on the company’s ability to assess, reorganize, and revitalize operations to adjust to changing market conditions. Flexible business financing options are also a key to successful restructuring. Seek the help of turnaround advisors and experienced alternative lenders to ensure the greatest level of success.
ABOUT eCapital
Since 2006, eCapital has been on a mission to change the way small to medium sized businesses access the funding they need to reach their goals. We know that to survive and thrive, businesses need financial flexibility to quickly respond to challenges and take advantage of opportunities, all in real time. Companies today need innovation guided by experience to unlock the potential of their assets to give better, faster access to the capital they require.
We’ve answered the call and have built a team of over 600 experts in asset evaluation, batch processing, customer support and fintech solutions. Together, we have created a funding model that features rapid approvals and processing, 24/7 access to funds and the freedom to use the money wherever and whenever it’s needed. This is the future of business funding, and it’s available today, at eCapital.
James Poston
James is an experienced product expert in receivables financing, trade finance including purchase order financing, and asset-based lending. In his role, he oversees eCapital’s sales strategy by driving business development and creating unified revenue generation processes across our organization. Utilizing his experience in developing strategic relationships and nurturing strong networks, James is positioned to expand our company’s market footprint and industry associations.
Prior to joining the eCapital organization, James served as Executive Vice President and Sales Director for Bibby Financial Services Canada. During that time, he participated in all aspects of the organization including operations, credit and finally business development where he was named a 40 under 40 Award recipient by Secured Finance Network.
James is a Chartered Professional Accountant and Certified Management Accountant and holds a Bachelor of Economics degree with concentrations in international relations and political economy from McGill University.