Financial Turnaround: Advice For Struggling Businesses

With a historically high proportion of businesses encountering financial difficulty, it is more important than ever that they be aware of the options for financial recovery should they land in dire straits. Steve Swayne, Chair of the Institute for Turnaround (IFT) and Chair of Kingsgate, describes the steps embattled businesses can take to stay afloat. Published in Finance Monthly 28 July 2020

To state the obvious, while the playbook constructed through the 2008 global financial crisis may provide a guide for responding to the current situation, businesses across the world are facing unprecedented challenges. The combination of health, operational and financial tests will pose challenges for previously stressed sectors, and for successful businesses and talented management teams alike. At the end of 2019, the Institute for Turnaround, the accrediting membership body for turnaround professionals, estimated that some 130,000 businesses were distressed, and mid-pandemic, the challenges are even more acute.

On average some 300 plus companies fail every week in the UK, with multiple effects: employees lose their livelihoods; customers lose access to services; suppliers, creditors and shareholders lose money. Not every company can or should be turned around, but there are many stressed businesses that, with professional time-limited expertise, can reverse their decline and prosper. In 2019 we conservatively estimate that our members saved more than 200,000 jobs and protected £2 billion in enterprise value. In 2020 and for the medium term we are likely to see even highly competent leadership teams, with heretofore successful business offerings stressed and challenged.

What is turnaround?

Corporate challenges that lead to failure come in different forms, whether internal factors such as the wrong governance, the wrong people, the wrong financial structure – or from external factors that are harder to control: asset damage, competitor innovation – or black swan events such as the COVID-19 pandemic.

Turnaround occurs when a business takes successful actions to correct a period of declining financial performance or shock, which may threaten its solvency. A typical turnaround business:

  • Is stressed but not fatal, situated on the spectrum between underperformance and distress;
  • Is experiencing a decline where a failure to remedy will lead to business failure;
  • Has a viable future, with a solid business offering, which may need to be adapted.

The first measure in turnaround is crucial: stepping in early enough to address both immediate and underlying issues and rejuvenate the business. The sooner a business engages in a turnaround process when they are on the distress curve, the greater the prospects of success and the better the outcome in terms of jobs secured and value saved. Just as you would call in a lawyer or an IT specialist for expert help when required, so too do businesses call on turnaround experts when the outcome is the difference between a business rescue or collapse.

Over the typical 18-month period of a successful turnaround, there are core phases.

  1. Diagnosis: involving an urgent, high level analysis of the problems the business faces, to determine whether there is a pathway to success.
  2. Build stakeholder confidence and support: getting everyone on board with the plan: shareholders, lenders, investors, suppliers, employees and customers.
  3. Stabilise the finances: get cash flowing into the business, reduce debt, extend credit, reduce inventory, cut costs
  4. Rehabilitate: restructure finances, cost base and cost controls. Refresh leadership skills. Develop strategic vision and turnaround plan.
  5. Articulate a strategy for growth: develop a sustainable business strategy for future growth.
  6. Exit: turnaround should be a situational intervention: once a normalised state of affairs has been achieved it is time to move on.

Turnaround professionals combine specific situational financial and operational restructuring skills with the experience, often having been CEOs of running businesses at the sharp end. They are united by a single motivation: a deep-seated desire to resuscitate viable but stressed businesses.

The IFT is the accrediting membership body for turnaround professionals. Every IFT member has undertaken a rigorous accreditation process and signs up to transparent professional standards. The IFT can recommend turnaround professionals directly to business.

Published in Finance Monthly 28 July 2020