Business turn-around for dummies – a Step-by-step guide to business turn-around:

This is not really business turn-around for “dummies”, but for professionals who are run off their feet fighting fires leaving them no time to step back and develop a step-by-step process to pursue business growth opportunities and a return to profitability.? It is unlikely that you’ll find 1 golden bullet that will fix all the profitability challenges, so that a number of co-current and in-series initiatives have to be undertaken.

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Restructuring and cutting jobs is the dummies’ way to reduce costs, but more often than not, without an in-depth analyses as below, it merely buys time whilst taking away the business resilience, i.e. the business’ ability to bounce-back.? I propose the following:

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1.???? You absolutely have to achieve positive cash flow from Debtors, Creditors, Overheads, working capital (inventory and WIP) as a starting point.? Cash is king.? Cash flow is the blood in your business’ veins.? ?

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2.???? There is an uniquely odd South African business practice to give settlement discounts to customers for paying their due accounts on time.? This is a hangover from the 1990’s when South African interest rates were exceptionally high and it must be weeded out!? In the Coastal regions settlement discounts as high as 2.5% are often given – what ludicroucy!? It equates to a 30% annual interest rate paid (given away) by you to your customers on the money they owe to you.? In Gauteng the norm as subside to 1% which more or less reflects the reduction in interest rate, but the principle remains ludicrous.? As a negotiated outcome, not fighting business “culture”, no more than 1% settlement discount should be agreed to, but only after you provided for that in your selling price.? Reduced settlement discounts drop directly onto your NPBIT line, i.e. a company that negotiates settlement discounts down from 2.5% to 1.0%, will immediately boost their bottom line with 1.5% of turn-over – e.g. On R 100-Million turn-over with a 6% PBIT, such reduction in settlement discount will result in an additional R 1.5-Million on PBIT, improving from R 6-Million to R 7.5-Million, or +25% where it matters most.? This must be the easiest bottom-line improvement ever.

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3.???? Audit BOM product costs to ensure fair/accurate cost allocation to each product manufactured – all too often, product costs are subject to management decisions in order to render a “new” product free of its fair share of overheads and other costs in order to execute a rapid market penetration strategy, or a relaunch of a product to extend its life-cycle.? Variable costing masks poor profitability during a market penetration strategy but it impose heavy burdens on other products and can lead to business decision mistakes if not rectified.? In your cost accounts, over- and under-recoveries at product level will be the give-away.? Make an effort to understand the rationale behind the sluggards in your portfolio and question whether or not those arguments are still valid.? Personally, I’m an advocate to have the poor profit performance visible and to remember why it is so, rather than hiding it in cost allocation.? It is only when low margin business is “in your face”, that you are motivated to resolve the challenge.? Only when you face to uglies on the table, will you be able to manage your product strategy.?

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4.???? Having determined accurate product cost, identify products and customers who yield negative- or poor profit margins and address those with aggressive selling price corrections.? Even if you lose the sales revenue on poor margin business, your bottom line will immediately improve, you can only gain big or gain smaller from this, but either way, you win.?

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5.???? Do a product performance analysis, ala the Boston Matrix approach.? Do actual performance match the expectation of “Dogs” (or “Pets” if your favourite products have lacklustre performance, or are new launches), “Cash Cows” (that require price- or cost management decisions), “Stars” or “Problem Children” (product maturity).? Match these classifications on a product maturity chart (looks like a tensile stress vs. deformation curve) to confirm that the classification is correct.? Review and redevelop your product strategy accordingly.?

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6.???? Do a market segment analysis on the same basis as the product analysis above, which market sectors are “emerging” or “dogs”, “cash cows”, “stars” and/or “problem children”.? A clinical, cold understanding of the relevant market segments that you do business in, must drive your business strategy or –tactic in each segment, within your overall strategy.

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7.???? Do a customer turn-over and profitability performance analysis on the same bases as the product analysis above, within their relevant market sector – understand whether your customer(s) is/are gaining or losing relative market share and use that information in your customer strategy.? Understand where your business is making money, treading water and bleeding.? Also super-impose a customer potential analysis on the same basis – as it is much easier to grow your market share (e.g. “percentage of the customer’s throat” to use a beverage market term) at existing customers than what it will be to grow through “new” customers.? Growth through new products in new markets, to new customers is the hardest turn-over growth to achieve.? Rather pick the low hanging fruit.

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8.???? Understand the business strategy of your current and desired customer base.? Understand that customer strategy and executives who subscribe to value-added principles and/or total cost of ownership sometimes do not filter through to the end-user of your product or to the customer’s commercial team members.? Never offer value-added solutions to customers or individuals within a customer organisation who subscribe to the lowest direct cost principles, they will not reward you for any value delivered to them, it is best to stick doggedly to the lowest direct product cost option to them, even at the product service levels that you can get away with.? Do not waste your resources on the “cheapskates”.? Reserve your service excellence for customers who value it enough to pay for it, and do make them pay.?

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9.???? With the information from points 5, 6, 7 and 8 in hand, you must develop a business plan regarding which products to sell at what level of customer service commitment and how that will translate into your business margins.? Favour customers who are growing their relative market shares in the market sectors that will offer growth and stability to you.? From this information, identify who will be your “key customers” from a growth perspective – remember that your largest customers may not necessarily translate to being “key” to your growth initiatives, but will be important in your profitability drive through margin improvement.?

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10.? Do not pamper “pet” customers – if they will not contribute to your growth plans, then either cut the tail of your customer base, or make them pay the highest price that you can justify and offer the lowest cost service and/or product support.? Quite often “smaller” customers will consume a disproportionate amount of support resources – get out of this trap as fast as you can.?

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11.? In parallel to the financial- and sales related activities above, a critical process review to eliminate waste (raw material, production scrap, rework, idle time, non-value adding activities) as far as possible is equally essential – Selling price related “swings” will benefit the bottom line to the extent that your business’ Gross Margin translates to PBIT.? Operational cost optimisation will have a similar but probably smaller swing on PBIT.? Quality improvement and Kaizen programmes can deliver real value, but poor implementation and bad change management practices which leave employees to view such initiatives as “the flavour of the month”, adding more (administrative) work with little personal benefit, create resistance and doom the programmes to failure.

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12.? Implement a rigorous change management programme.? A lack of profitability rubs off on employee morale and motivation.? If you do not succeed to change the mindset of your employees, to embrace new business initiatives, you are dead in the water.? The best laid plans will come to nothing when you fail at change management – I’ll write separate notes on change management in the foreseeable future.? ??

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13.? Make sure that you also implement a rigorous performance management system.? Performance Contracts must set authority limits, and clear responsibilities.? Whilst it must be done in a collaborative spirit, the process is not by general consensus, it is a business tool.? Management responsibility is to manage.? Set no more than 5 or 6 realistic but challenging quarterly goals for each employee, do quarterly reviews and agree on corrective actions to be taken.? The best way to motivate employees is to be clear what their duties are and the best way to be clear is through a performance contract.? Evaluation must be fair, but cold – don’t beat about the bush, focus on the facts.? Recognition must be given for performance excellence and corrective action plans, with sanctions, for poor performance in the absence of justifiable cause.? An employee-orientated PDP (Personal Development Plan) that is aligned with the business strategy and –plan can be incorporated with the Performance Contract, with the PDP responsibility ascribed to the employee.? ?

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In my personal experience I have witnessed how poor Performance Contracts yielded counter-productive activities:? In a company with several production sites in various locations, the operational people were primarily measured and incentivized against budgeted cost.? The production sites immediately cut back on their maintenance expenses, with horrific impact some time later, but in the short term they received bonuses for their misbehaviour.? The distribution staff, who transported product between sites, to fill the production gaps in order to deliver customer requirements, exceeded their transport budgets and sacrificed their incentives in the process.? In short, the bad guys were rewarded for bad behaviour and the good guys were penalised for not dropping the ball.? In short, the setting of Performance Contracts must be done with open minds, considering its impact on the rest of the company team.? I am of the opinion that “role play” in a board room can identify and prevent counter-productive behaviour before it happens.? When it happens, it must be dealt with quickly and decisively.? ??

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14.? Business-oriented training programme is essential and must be geared towards the development of a high performance organisation in order to serve the business strategy.? If training is correctly focussed, it will deliver bankable returns.?

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The abovementioned points do not constitute an exhaustive list of business turn-around activities, but it will definitely deliver results.? You are likely to discover more avenues to pursue when you embark on this process.? Please share your thoughts and experience in the “comments” below.

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Yours faithfully,

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Barnie.