Effective turnarounds are built on clearly defined plans, which in turn are built on a clear understanding of the situation and the factors responsible for it.
Therefore, the diagnosis of the turnaround situation should take both external factors (market, competitors, customers and suppliers) and internal factors (results, plans and operational efficiency) into consideration – and should give an overview of the current situation and explain what has led to it. This is important in order to make a constructive plan for the future.
"Most ailing organisations have developed a functional blindness to their own defects. They are not suffering because they cannot solve their problems, but because they cannot see their problems." - John W. Gardner.
There are four overall value creation levers. In order to quickly generate positive cash flow Net Working Capital (NWC) improvements should be prioritised first to free up much needed cash. Then, cost reductions to boost earnings. Then commercial efforts to increase sales where possible. And finally, rebalancing the financing obligations with the forward-looking cash generating capacity of the business. Note that this turns the normal management order of priorities on their head to an extent, as the primary focus tends to be developing commercial priorities, then cost management, then NWC management.
NWC can be dealt with through reduced inventory, extending accounts payable by negotiating payment deferrals, for example, and collecting accounts receivable by enforcing overdue collections.
There are several ways to lower costs, with the main ones being rightsizing the organisation and making sourcing and supply chain cost savings. Time is of the essence when it comes to cost reductions as delays can result in the need to cut costs even more.
With regard to commercial efforts, certain sales-related efforts – for example pricing, pruning complexity and improving commercial effectiveness – can be a great source of short-term value creation.
Finally, organisations effecting a turnaround need to rebalance financial obligations with the new cash-generating capacity. This can be done through asset management, renegotiating with debtors and securing additional financing.
The value creation plan should be summarised into a cashflow projection highlighting the main sources and drainage of cash, timescale and best, likely and worst case scenarios.
This cash flow scenario is key to a structured and disciplined turnaround plan, which starts with clear targets followed by pressure-tested action plans aligned to the value creation priorities as well as disciplined implementation and follow-up.
Beyond intense ambition, decision-making and action, succeeding with turnarounds also demands strong change leadership, which needs to be applied throughout the organisation to ensure effective communication and realisation of desired results.
Live webinar series
If you missed our short bite-sized webinars focusing specifically on the subject of turnaround, the presentation decks can be downloaded here:
- Slides from the first session on how to manage turnarounds in times of crisis.
- Slides from the second session Turnaround diagnostics.