A business turnaround is the process of executing survival measures, identifying strategic improvements, executing corrections, and moving back into a growth trajectory. If your small business is facing dwindling cash reserves or you are wondering how to turnaround an unprofitable business, read on.
How Does the Turnaround Process Work?
Most small business owners assume a turnaround is just calculating and implementing layoff large enough to achieve profitability. While reduction in force is one tool used in a turnaround, the actual turnaround process is more comprehensive and must be custom-designed to your business situation. This is why it is important to hire a turnaround professional to map your course and avoid unnecessary damage (or complete failure.) Here is a general turnaround process to follow:
- Calculate and maximize cash runway. This is done using a 13-week cash forecast, negotiating with creditors such as your bank or suppliers, and pulling forward revenue.
- Analyze the systemic cause of cash shortfall. The root cause of a crisis is never obvious (otherwise you probably would have fixed it by now!) Although we often blame economic downturns like Covid-19, true root causes are lurking problems like bad cost accounting, unhealthy working capital structure, bad quoting/pricing strategy, or even fraud.
- Design & execute a business turnaround plan. The exact multi-step strategy will depend on the cause of your downturn, but may include:
- Cutting/focusing products or services
- Restructuring your teams
- Reducing or increasing R&D investments
- Reduction in force (layoffs, furloughs, or pay reductions)
- Recapitalizing business debt and/or equity
- Liquidating assets
- Adjusting pricing strategy
- Or other changes
- Measure and adjust. Turnaround is rarely a “one-and-done” process. A business turnaround plan includes feedback systems to measure success and adjust strategy to changing conditions.
When do I Start a Business Turnaround?
If you are unsure if your business needs a turnaround, ask yourself these questions:
- Is my cash balance continually running lower?
- Has the business suddenly and surprisingly become unprofitable?
- Do my sales consistently miss goals?
- Is it ever a challenge to make payroll?
- Are suppliers and creditors calling me about past-due bills?
If you answered yes to one of the above questions, you may benefit from a business turnaround plan and should consult with a turnaround consultant to assess your situation.
What Does a Turnaround Consultant Do?
Most business owners and executives will face 2-3 downturns in their career which means they do not have adequate experience to successfully turnaround an unprofitable business. Is it any surprise then that so many small business owners struggle and fail in a downturn?
A turnaround consultant on the other hand will manage 2-3 downturns per year with clients across different industries. That’s 30x more downturn experience than the average executive, which means they quickly and accurately identify how to turnaround your unprofitable business.
How to Choose a Turnaround Consultant
Turnaround consultants come in many different flavors: from investment bankers to lawyers to fractional CFO’s and COO’s. The right specialty will depend on the diagnosis of your downturn, but only the CFO will have a global financial view of your company, so we recommend beginning there. The fractional CFO may then refer you to an attorney or COO as appropriate.
When choosing a turnaround consultant, look for the following qualities:
- Listens to you and customizes their approach to your business. Be wary of salespeople pushing a packaged solution that may not fit your needs.
- Has a plan but adjusts and evolves to new information. A turnaround is a dynamic process responsive to changing conditions and new data.
- Does not work for commission. Professionals who take commissions on debt restructuring are have a myopic goal and do not have your best interests in mind.
- Does not work for equity. Although equity is more available than cash, giving away equity to a consultant will cost you more in the long run.
- Works primarily in turnarounds. Turnaround work is a specialized profession which means your CPA, board advisor, or small business attorney is not experienced enough to ensure success.
Contact a Turnaround Professional Now
If you are unsure whether your business would benefit from a turnaround professional, contact us now to learn about your options. Pete Kos, our Turnaround CFO, will listen to you, ask smart questions, and help you decide if you would benefit from professional services. Contact us here to schedule your free consultation.
