It's important to recognise when your business is floundering or anticipate future problems, so you can get the appropriate help.
Where is the problem?
Understand where the problem exists. Remember that profitability is dependent on three things (or a combination thereof) – selling more, achieving higher margins (i.e. buying/producing cheaper or being able to charge a premium for your product) and reducing overhead expenses (lower insurance, operational cost, rental, etc.).
Often, some extensive investigation, typically through evaluating financial management accounts or some operational data, will indicate where the changes in the business's performance are. If you asked the question "what are financial management accounts?" you already know that you do not track the financial performance of your business on a monthly basis – which is the reason for almost 50% of failures in SMEs.
Once you understand where the problem is in the business, you can start working on a remedy.
What causes the problem?
Linked closely to "where" is "what". You need to understand what the reasons are for the problems in your business. In today's tight economy, many businesses face dwindling revenues and therefore have a cash flow problem. The reality is that cash flow is never the actual problem – a shortage of cash (i.e. working capital constraints) is always a symptom of a problem that manifests in the working capital of the business.
Selling too few items, low sales revenue but fair margins, low margins, high stock-holding, etc. are all examples of operational problems that will erode working capital (i.e. cash available to sustain operations). You can identify these by evaluating the operational data or financial management accounts (here they are again) of the business.
How to fix it
Now that you know the where and the what, the next important matter is how to fix it. In turnaround management you always focus the majority of resources at the areas that will "stop the bleeding" the quickest. Rid yourself and your business of unnecessary costs that do not contribute to long-term sustainability. For example, the instalment on the luxury SUV you bought in prosperous times that is draining cash from the business now that turnovers are down.
First get the business profitable and on solid ground before taking your expenses to the next level. Remember that cash is king and if cash is flowing out too quickly, there might be no business left to manage.
Other times it might not be easy to determine where the major problems in the business are. Make sure you have intimate knowledge of the activities and performance of your business to be able to detect possible areas of bleeding by systematically working to find areas that need attention. Quite often when there isn't an obvious reason for distress it might be because there isn't just one, but a few small areas that contribute.
Determine what internal resources (people, processes, equipment) are needed to address the problem. It may be that you need to engage key employees to come up with a solution. This will have multiple benefits, which will possibly include a better solution than just yours; buy-in from employees that you are committed to solve the problem; and, their commitment to see the solution through.
Often, entrepreneurs' first reaction is that the business needs more money – that's like pouring more milk into a leaking jar. You first need to figure out where the leak is and then fix it before you can pour in more milk. It is the same with money. You will need to show potential lenders that you have fixed the problem before they will consider contributing additional funding to the business.
Championing change and turnaround
Once the plan on how to fix the business has been made, it needs to be implemented and championed. A senior person in the business, preferably an owner, needs to take responsibility for implementing the turnaround plan and ensuring the plans get managed efficiently and effectively. Specific milestones must be set, action dates agreed and adhered to and regular progress monitoring done.
A very important fact is that the more senior the champion of such a plan (or any) is, the better the success of said plan. This champion might not have the ability to dedicate all of their time to the project, but can at least dedicate other resources (including people) to achieving the goals set.
Sometimes challenges are too complex to solve internally and need to be discussed with an expert that is not as close to the business as the owners or management. Or sometimes it is just plain silly to think you can solve a problem without outside assistance. It might be a good idea to contract a mentor, adviser or consultant to assist in such occasions.
The person should have the right experience, background and knowledge to assist your business. Do reference checks and understand his or her abilities. Set clear terms of reference, expected outcomes and milestones for this individual to achieve, since you will be entrusting them with a large part of the responsibility to return your business to profitability.
Make sure you stick to the plan – it doesn't matter if it is your own or an external adviser's plan, it should be used as guide to grow the business. Then, make sure you continuously evaluate all actions against this plan.
Monitoring progress also means re-assessing if the plan is still appropriate in the current conditions. Regular evaluations need to be done against the goals set to ensure the turnaround strategy remains on track. The saying goes that you can only manage what you measure, so make sure you measure your progress according to this plan.
Celebrate small successes
People often only celebrate the large events in life, both personally and in business. Make sure that each achievement in the journey to return your business to its healthy state is celebrated. For example, each time a new client is contracted towards higher turnovers; or any activity that gives rise to achieving the end-goal, warrants celebration. It will keep you and the team focused and also underline the fact that progress is being made.
Albert Einstein said that we cannot solve the problems we face today by the same level of thinking that created these problems. Therefore, think wider about your business and think of ways in which you can mitigate the risk of a re-occurrence in your current situation. How can we sell more, better, faster? How can we access new markets? How can we achieve growth without necessarily incurring higher expenses? Work smarter, not harder.
Don't let it happen again
Remember that business, as life, runs in cycles. There will always be times of prosperity, followed by times of hardship – it's the way life works. When things are going well, keep on working smarter to ensure the business stays lean and that you build in enough reserves to cover for the lean years.
Spend money on improving your business and increasing efficiencies. Once you have done this, the business will be on solid ground for both the prosperous and the lean times and when you are in this position it will be easier to manage the tough times.
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