Economic downturn: What I learned turning around failing businesses

Given today’s global turbulent business environment it’s no surprise that businesses can and do fail. According to the U.S. Bureau of Labour Statistics, about 65% of businesses fail during the first ten years and only 25% of companies make it to 15 years or more. In Australia the ABS reports that only 74% of large businesses are still operating after four years, and that rate falls to less than 60% for small businesses after the same four-year period.

What is my experience with failing businesses?

As a business manager for over 30 years, I have my fair share of experiences in working in companies that have needed to put in place and execute a turnaround plan. Early in my employment life I worked for a company that went into administration when they failed to generate enough cash from operations and had no plan to get funding from elsewhere.

I also worked for a large publicly listed firm in Australia where I was asked to lead a division that had accumulated large losses of many years. My business here at Asuria performed a turnaround of a firm that, for the previous 10 years since inception, had never made a single dollar of profit and had cost the previous shareholders over A$30 million in lost equity.

In this article, I will share my experiences turning around various businesses with differing problems; I will talk about how we developed and executed a business turnaround strategy; and I will explain what business turnarounds are, and provide a step-by-step guide to conducting a business turnaround with tips and examples.

What’s true for companies globally, small, medium, or large, new or old, is that poor financial returns are the ‘canary in the cage’, and that poor financial returns are often preceded by a lack of stability in key personnel, mismanagement, ineffective business strategies, macro-economic factors, or where a once-promising idea or invention goes out of favour.

You can see this clearly with companies on the share market. Once profitable companies with a rising share price can quickly or slowly turn and have their share prices beaten down.

How to make a successful business turnaround?

I define a business turnaround as the financial recovery of a firm that has been performing poorly for an extended time. A successful turnaround strategy should bring stability and profitability after a period of financial issues, ineffective strategies, or mismanagement.

All turnarounds are different, and we can’t prescribe a template or checklist, however, there are undoubtedly many common ingredients. If the performance or finances of your business aren’t at the standard you’d like them to be, here are some common ingredients and steps you can take to improve cash flow, restore financial stability, and effect positive change.

Be transparent and get the team involved

At Asuria, and just after we acquired the business from the previous shareholders, I worked on getting the entire team committed to a common goal – this was crucial to the success of our turnaround strategy. My leadership team and I cultivated a work environment of collaboration where team members were able to feel a sense of shared responsibility.

This was no mean feat, as after years of mismanagement there was a lack of trust between staff and management; they had heard it all before and had never really experienced great leadership. I also spent time communicating honestly and openly, conducting essential conversations with my leadership team, bankers, creditors, and employees. This was crucial to ensuring everyone’s investment in making the turnaround strategy work.

When businesses approach turnarounds in this manner, with transparency, accountability, and adaptability, they can often return from periods of prolonged decline.

Identify the problem

If you don’t diagnose the problem(s) well enough, you run the risk that you will choose actions that are only marginally helpful, or at worse, accelerate the demise of the business.

So, the first step in designing a successful business turnaround strategy is to determine the source of the problem. Poor business performance could result from anywhere across the entire spectrum of business activities, including inefficiencies in processes, lack of appropriate financial and other performance data, management and leadership issues, or resource allocation. Here are some common areas that the diagnosis can explore.

  • Explore whether the business requires more resources or working capital, whilst not confusing the need for working capital with the need to fund losses.
  • Managers and leaders not suitable for the state of the business today.
  • What are the profits or losses of each of the different products and services?
  • Systems and processes leaking profits.
  • Marketing and sales issues.

Once you have the team involved and committed to a common goal, use brainstorming and collaborative sessions to give the group the opportunity to offer a wide range of suggestions as to where the problems might lie. However, be careful not to allow opinions to dominate the discussions. Data analysis is a critical ingredient to understanding the issues properly.

Use a data led approach. At Asuria we had to put on our detective hats to work out where the issues lay. We determined that one service line – the labour hire business – was the unit that was losing money, even though the accounting systems were saying it was profitable. This pointed to another issue, unreliable management data. So, we had to fix both.

Create the plan

Having identified the problem and gathered the support of your team, it’s time to start working on a plan to return your business’s viability. Focus on the critical problem areas – those problems that are most material to the business. With your teams, Identify solutions you can effectively implement to remove the issues, inefficiencies, or losses.

Describe your updated business model, revised sales strategy, or cost-saving techniques (such as staff reductions) that you plan to implement. Once you have a strategy in place that addresses the issues you’re facing, you can start implementing your process. Here are some solutions to the most significant issues I have found in a turnaround scenario.

Stabilising cashflows and restoring profitability

Stabilising cash and restoring profits should be a priority, and the severity of your interventions will depend on how much time you have to get the business stabilised. If time is against you then you should consider focussing most intently on cash and profitability.

Most turnarounds that involve a return to profitability necessitate a steadfast move to generating positive cash flows. Strict cash controls, selling non-core assets to increase cash generation, and better inventory management is vital to helping to restore cash stability.

Restructuring your debt obligations is another essential element to stabilising the business. It is also sometimes helpful to focus your turnaround plan on increasing profit margins by reducing variable costs. You should consider exiting unviable and unprofitable products and services and to design strategies to either eliminate those ventures or increase their viability.

Change of management

Poor management can be a scenario that requires serious reflection from the company, and often, the board. This type of plan may involve restructuring and reassigning managers who are innovative, realistic, and adaptable. Companies that take steps to address structural deficiencies often fare better than those who reject structural change.

Increase sales

If your strategy has time, or if you have managed to buy some time because you have stabilised cashflows and restored profits, then you can turn your efforts to generating more revenue without investing in additional advertising. You can increase revenue in several ways:

  • Increase prices: Raise the prices of some of your less profitable individual products and services to generate more revenue from your existing customers. It is definitely easier to sell to existing customers than new ones.
  • Convert more leads: Work on improving your success rate at engaging prospective customers. Increased conversions from prospect to customers will lead to increased sales.
  • Improve customer service: One way to increase sales is to provide a good customer experience. Customers are more likely to return in the future and recommend your products or services to others.
  • Generate new leads: The last strategy is to attract new customers. Lead generation is the most common way to increase sales but can be more expensive than other initiatives detailed above. Therefore, consider exhausting other techniques before investing in costly campaigns.

Presenting your plan

It would help if you considered presenting your plan to creditors in a realistic but optimistic way. In your negotiations, seek to obtain payment plans that are sustainable in the long-term to ensure your continued viability, and work to disengage with nonessential creditors.

Under no means should you trade whilst insolvent. Different countries have different requirements and also afford ‘safe harbour’ protections, but you must always follow the laws so that if the business does fail you avoid hurting people and firms associated with you.

Implementing the plan

A good business turnaround requires adaptability, quick reaction times, and thorough, unbiased analysis. If you find that something isn’t working, it’s okay to abandon it and start again rather than spend valuable resources on an ill-fitting strategy. If your product or service is becoming less appealing or essential to your customers, come up with ideas to revitalise your offers. Move on, or away, from ventures that aren’t turning around fast enough.

Often, old habits that got the business into trouble can start reappearing. When you see this, take corrective action. Businesses are often fragile during turnarounds, and it’s essential to identify and prevent adverse developments before they become a challenge. The key to getting ahead of old habits is early intervention. This requires leadership teams which are adaptable and transparent about inefficient processes or developments that need attention.

How do you know if you are on track?

A successful business turnaround continues even after establishing a return to profitability. Take the time to examine your operations and evaluate which elements of your strategy yield the best results. At Asuria, we knew we were on track after we stopped losing money.

But not only did we stop losing money, we were now starting to win new profitable new contracts and customers in new markets around the world, transforming the company from one that had never made a profit, to being one of the world leaders in outsourced human services to governments today. Despite the fact Asuria’s turnaround was a success, we continue to develop our strategy as we create new habits that support our long-term goals.

Con Kittos, Executive Chairman at Asuria.