When an organisation is in decline, the CEO is often in denial or ignorant of the fact that the company is about to hit that brick wall known as 'the burning platform', a pivotal point from which there is little chance of return.
It might sound disheartening, but if approached correctly with a turnaround strategy that provides both a temporary solution and a long-term one, these businesses can revert to a state of financial health.
Unfortunately, the signs of decline are often not apparent as they may be masked by positive ratios on the financial statements, with debtors, the liquidity ratio, net assets, liabilities and the like, offering misleading confidence. In these scenarios the business is still making a profit on paper. However, the stark reality is that the company is in serious trouble.
These indicators lull the business owner into a false sense of security, while 'white knights' such as a weakening rand are perceived as the solution to all the company's problems. However, the issues are usually a lot deeper.
One of the most obvious signs that a company is entering a phase of decline is when lending increases considerably. This creates a cycle that perpetuates itself, pulling the company into a deeper state of degeneration. Debtors push their payment terms and the company delays payment to creditors. This is one of the first 'red flags' or indicators that trouble could be brewing.
Problems with cash flow could also indicate that there is trouble ahead. However, the gravity of the problem can be hidden by financial manipulation, such as late payment or non-payment of creditors. This merely delays the inevitable. It's a case of 'live in hope and die in despair'. Thus, while the CEO might be comforted by the fact that there is money in the bank, his/her reading of the situation must be carefully balanced with debtors and creditors.
A common mistake is to only restructure debt and finances in an effort to snatch the company back from the brink of insolvency. This is, however, a short-term solution. A turnaround strategy must look at the entire business model (the income statement aspect of the financials) and not just the balance sheet, which can be manipulated to give a misleading of impression of the health of the organisation.
Another problem that speeds decline is the loss of skills. Crucial skills that the company might require in order to be successful are usually lost when employees detect that the company is weakening and management is not taking the necessary steps to rectify the situation.
The impact of this skills loss may only be realised a few months down the line, making it even more difficult to 'pull' the company out of its decline. Once the burning platform is reached, a company can do two things to try to steer the organisation back onto a path of profitability: increase sales or revenue; and reduce costs. It must be noted that this is a short-term solution that will not sustain the business for a long period of time. It does, however, 'buy time' to pull a company back to a point where deeper issues can be addressed.
These deeper issues can be monitored through performance, a central component to the 'well-being' of companies. To ensure a company does not lapse into decline again, there are a few key areas that need to be addressed: strategy, people, process, systems and information. These areas need to be assessed in terms of how they can be enhanced to take the company forward in a positive direction. Best practice is a good platform to start with and thereafter, benchmarking can greatly assist. It is prudent to look at competitors or other successful company models and establish their 'recipe' for success.
Most importantly, strict financial controls need to be implemented. For example, having a tight reign over creditors and debtors will go a long way in terms of preventing a business from going into decline again. And if there are commitments to financial institutions, ensure they are met. When your financial institution loses faith in your business, they are less inclined to loan you the working capital you need to restore the company back to its original healthy state.
It must be noted that turnaround consultants often specialise in an industry or niche area of business. However, if companies apply the principles of addressing the areas of strategy, people, process, systems and information, there will be resolution irrespective of what industry or sector the business falls into.
Underpinning this is the commitment to understanding what went wrong, why and how it should be resolved - and then to ensure systems and processes are put in place that encourage growth and sustainability.
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