What Is Turnaround Management? (Everything You Need to Know)
Turnaround management is the process of assisting businesses that are in a state of crisis, decline or recovery. This process is usually led by a turnaround consultant/manager, who is trained to both: a) help businesses recover operationally and become profitable; and b) restructure a company’s balance sheet.
Few companies wish to be in a situation where they need to retain a turnaround manager, but there’s no shame in it either — in fact, some of today’s most admired companies have gone through turnarounds, including Apple, Federal Express, Airbnb, Starbucks and many others.
What does turnaround management look like in practice? Here’s what you need to know.
When Can You Tell a Turnaround Manager Is Necessary?
Turnaround managers may be necessary when a company approaches the zone of insolvency. Insolvency can be defined in two ways: Cash flow insolvency, when a company cannot pay its debts as they become due; and balance sheet insolvency, when the company’s liabilities exceed its assets. These are further described as follows:
- Cash flow insolvency: While most companies experience short-term cash crunches, if operating hand-to-mouth each week becomes “normal”, a turnaround manager is necessary.
- Balance sheet insolvency: This form of insolvency is more difficult to measure, and the signs of crisis are not as bright. When liabilities exceed assets (using a fair market value), a company is deemed to be balance sheet insolvent. A turnaround manager may be necessary to help restructure loans, trade payables or other obligations, and the company has no other sources of capital.
It is not uncommon for a company’s creditors to point out the need for a turnaround manager to a company. In fact, many creditors may require the company hire a turnaround manager in exchange for offering terms of forbearance. Many insolvent companies are embarrassed to admit they need a turnaround manager, but retaining one early provides many more options for the insolvent company to recover than kicking the problem down the road.
Operational Turnaround vs. Financial Turnaround
In our experience, there are usually two different ways a turnaround manager will effect change. Let’s go over what both of those look like:
Some businesses fail simply because they do not operate efficiently. They may have too many layers of management, their products and services are not priced effectively, and/or the company hasn’t adapted its expense structure to meet changing market conditions.
In these cases, a turnaround manager will identify operational inefficiencies and outline a plan to correct them. In most cases, a turnaround manager will be retained as an officer of the company, empowered to make difficult decisions and implement needed actions.
Also referred to as financial restructuring, a financial turnaround largely involves restructuring the company’s balance sheet. This process may include consolidating debts, liquidating non-performing assets, shedding unprofitable divisions, negotiating payment terms with creditors, and in the most extreme examples, liquidating the assets of the business for the benefit of creditors.
What Are the Stages of Turnaround Strategy?
Regardless of which kind of business restructuring a company will need, you can expect turnaround managers to follow a similar, three-step process:
1. Assess the Situation
Turnaround managers must first diagnose the problem. In many cases, this step may be performed by the turnaround manager before he/she is actually retained. They will identify:
- What is causing the problem?
- Is it a temporary or long-term issue?
- How severe is the problem?
The turnaround manager can usually diagnose the problem by looking at the company’s financial records, including the income statement, balance sheet, AP and AR aging reports, inventory reports and so forth. It’s common for insolvent companies to get sloppy with their financial record keeping, but good information is critical to help the turnaround decision make well informed decisions.
2. Consider and Evaluate Options
After the problems have been identified, a turnaround manager will evaluate solutions. A good turnaround manager will always start by asking whether an operational turnaround is possible. In some cases, an operational turnaround isn’t feasible. Consider Blockbuster Video in the age of Netflix, for example. In other cases, such as with Apple, an operational turnaround can be accomplished by trimming the company of excess operating expenses, selling non-performing assets, and so forth.
Expect the turnaround manager to spend most of his/her time evaluating options. They will look at all possible alternative solutions, and will create financial models in support of them. The turnaround manager will socialize these options with the company’s executive team, board of directors and affected parties such as creditors, employees and so forth. Once the plan is agreed-to, the work begins to be implemented.
3. Execute the Plan
With a plan in place, the last step is to put the plan into action. This is easier said than done! In some cases, as an officer of the company the turnaround manager will implement the plan and be accountable for the results. In other cases, he/she will empower other stakeholders to implement. No plan is perfect and there will be several pivots along the way. The turnaround manager will measure performance regularly, and will review milestones with key stakeholders including creditors. Progress during this phase will be heavily monitored, and the plan will be adjusted as needed.
Find a Professional Turnaround Consultant with Amplēo
If your business needs an operational or financial turnaround, you can trust Amplēo’s turnaround consultants to help you get back on your feet. Get in touch with our turnaround team today to help save your business.