Eight Things You Must Do When Creating a Turnaround Plan
Is your company struggling financially?
If so, it may be time to create a turnaround plan. Turnaround plans assist companies in identifying the cause of underperformance; reverse it and return to profitability. There are a few essential elements to any financial turnaround business plan. Following are some basic actions and best practices to consider.
- Don’t waste time. If the company is performing poorly, don’t procrastinate. I’ve seen far too many financial disasters occur simply because managers and advisors are passive. If things are degrading, act now. Time can be your friend, or it can be your enemy. For turnarounds, unfortunately, it is too often the latter.
- Understand short-term and long-term cash flows. I suggest creating a 13-week cash forecast to understand short-term liquidity. The 13-week forecast should be updated and reviewed on a weekly basis. Ideally, the forecast shows how much time is available before a liquidity crisis occurs. It also shows how serious the crisis will be. A long-term, 12-month forecast can be used as an input for the 13-week cash forecast. It should also be used as a planning tool for the turnaround plan, as well as a communication tool for your lenders.
- Understand the financial gap that needs to be fixed. The gap is the difference between expected cash flows and desired cash flows. If your projected cash flow for the next 12 months is -$1,000,000 and your desired cash flow for the same period is $250,000, then you have a $1,250,000 gap. All actions taken should be focused on closing the financial gap.
- Create a plan to close the gap. You must identify enough action items to eliminate the gap. ($1,250,000 in our example above.) Typically, gap closure action items include:
- Restructuring savings (layoffs)
- Overtime restrictions
- Material cost reductions via negotiations or outright substitutions
- Benefit cutbacks or eliminations
- Perks eliminations
- Budget reductions for discretionary spending such as advertising, trade shows, charitable contributions, training, association fees, etc.
- Fees and rent reductions via negotiations
- Compensation reductions for owners and key executives
- When creating the plan to close the gap, do not count on unconfirmed revenue increases. If the revenue increases are contractually locked-in, then use them. If not, don’t count on them. Counting on revenue increases is like gambling. You’re risking your company by betting that unknown revenue increases will occur. Instead, focus on things you can control!
- Make the plan actionable. It must include:
- Detailed action items
- Completion dates
- Action owners (persons responsible for ensuring the items get completed)
- Associated costs and savings (estimated costs and savings need to be built into the long-term cash flow projection)
- Include trusted advisors on your team. In particular, keep your banker involved in the process. Having him or her involved in your plan improves your chance of having lender leniency, should it be needed.
- Be aggressive! It’s better to be somewhat aggressive rather than overly passive. Based on my experience, being too passive frequently leads to deeper financial crises. Acting fast and aggressively allows the business owner more time to make better, longer-term decisions.
All of these recommendations should be included in the initial phases of turnaround planning. I call this the stabilization phase. Once the company has been stabilized, then long-term actions and changes can be added to the turnaround plan. The long-term actions and changes should be focused on core changes to ensure the company grows profitably well into the future.
If you’d like to discuss any of these recommendations, contact me at email@example.com.