Execute a Turnaround Before You Need to Execute a Turnaround!
Having been involved in four turnarounds over the years, my best advice is to stay away from having to do one! While successful restructurings are positive in the end, they often include a litany of difficult and painful decisions (store closures, layoffs, and the like) which are best avoided if possible. Unsuccessful turnarounds speak for themselves. The good news is there are many management disciplines and tactics which will help any business avoid having to execute a true restructuring while improving their health, and better positioning them for future, profitable growth. None of these are “silver bullets”, nor are they one-time efforts. They must be imbedded into the leadership culture and practiced as a routine part of running any business. It’s hard work!
Please do not make the mistake of thinking that practicing these “turnaround” techniques is only for money-losing businesses. They are for every business, regardless of profitability and growth rates. There is a long history of one-time “highflyers” crashing and burning, and then there is the more common slow creep of declining profits (but not necessarily negative profits), increasing expense ratios, shrinking gross margins, and reduced working capital that eventually push a business near or into bankruptcy. If you pay attention to these and other risks daily, weekly, and monthly, they can be addressed before they get out of control. So again, we always preach “every business, every day”!
So, here is an overview of the game plan:
- Leadership Must Face Reality: “denial” and “wishful thinking” are business killers. Issues, problems, challenges cannot be addressed and fixed unless business leaders admit to themselves and to their teams that they exist. “Our growth is great, don’t worry that our working capital is shrinking”, “I know sales are soft and expenses are up, but we are still profitable”, and “We just hit a rough patch, but things will turn around, they always do” are all huge red flags. I bet you have heard at least one of these comments in the past!
- Dig into The Numbers: it is imperative that leadership understands their numbers intimately. If the numbers are not tracked thoroughly, start today! If data is available, it needs to be dissected and understood. This understanding will become the basis for planning and executing the various fixes for the business. Some examples:
- Apply the 80/20 rule; which items generate 80% of your revenues? Which items generate 80% of your gross margin dollars? The answer will most likely be about 20% of your SKU’s. Then the question becomes, what should be done with the remaining 80%? Cut them? Cut some? Lower reorder points?
- Set and maintain a set of KPI’s (key performance indicators) and see what they tell you. They always tell a story! Is store traffic down? Is the average transaction value down? Are the units per transaction down? Is the customer acquisition cost up? Is customer lifetime value shrinking? Are inventory values growing? Is aged inventory increasing? All of these, properly understood, can lead management to devise and implement real solutions. First analyze the “what”, then the “why”, and then the path forward will become clear.
- Develop an Aggressive and Measurable Plan: once problems are identified, an improvement plan can be drafted to address them. A classic tendency is to cut expenses to deliver a bump in profits. While reducing expenses should absolutely be a part of this plan, keep in mind this is a short-term, non-sustainable tactic. Eventually there will be no more expenses to cut, and then what? Therefore, it is imperative that any go forward course-of-action include meaningful revenue building tactics. Without sales growth, there is no long-term fix for the business. So, questions such as “which team members/ positions truly add value to the business?”, “which customers drive the majority of our sales?”, “which categories contribute the most/ least to the top & bottom line?”, “which sales channels are the most/least profitable?”, and “which promotions have the greatest ROI?” should be asked, answered and acted upon. As the plan is devised, keep two things in mind:
It should be measurable so you can track progress and results in a quantitative manner.
It needs to be aggressive. Ego, perceived loss of buying power, and similar reasons often result in turnaround plans that are too conservative and simply will not sustain the business over the long haul. Think about how many businesses exit a bankruptcy only to re-file shortly thereafter (there is even a term for this, “Chapter 22…which is, unfortunately, Chapter 11 done twice). They simply were not aggressive enough in devising and executing their restructuring plan.
- Communicate & Delegate: there is not a business leader anywhere that can fix the issues of a challenged company alone. It needs to be “all hands on-deck”. For that occur, the entire team needs to understand the business issues, the “turnaround plan” (do not pull any punches; be brutally honest), the short-term pain and the future goals. Communicate this often in group settings and one on one. Ask questions about progress; provide feedback on progress; provide praise often and re-challenge the team as needed. Just as all members of the team must understand the issues, they must also be trusted to help fix them. Delegate tasks and be clear on the deliverables. Clear understanding leads to accountability and that accountability will typically result in the attainment of the plan’s goals. The team will step up! The sum is always greater than the whole of its parts (sorry for the cliché but it is true)!
- Back to communication for a moment, beyond the 4-walls of the business, there is a tremendous amount of value and goodwill that can be attained by being open with other constituents, including vendors, lenders, investors and even customers. Don’t be shy about reaching out and explaining the business issues and the plan to fix them. Silence is scary, exhibiting trust and confidence is not.
a. Track results versus plan. Continuously update plan for future time-periods using the theory that all goals must be measurable.
b. Forecast cash flows & cash on-hand religiously. Cash is the fuel of the business, and leadership must always know how much working capital is in the bank today and how much is projected to be there in a week, month, and year. This is a dynamic effort that changes potentially daily as business circumstances dictate, and therefore the data must be updated daily.
c. Find ways to incorporate the disciplines developed during this “pre-turnaround turnaround” into the everyday management of the business. It will inherently make the results better and better. OKR’s (Objectives and Key Results) is a tool I love, but that is a discussion for a future newsletter.
