Getting your company out of a financial ‘hole’

Getting your company out of a financial ‘hole’

Jack Welch, the former chairman and CEO of General Electric once said “Change before you have to”. When you see tell-tale signs of a decline in your business you better start taking drastic measures to steer your business back to safe waters.
In the mid 1980’s, IBM failed to pick up signs in the market place of impending changes in the computer industry. IBM thought the future would be much like the past and as a result didn’t have to change much.

IBM didn’t realize how much microcomputers would replace the functions of their bread-and-butter business, the mainframe. Failure to change earlier resulted in tens of thousands of people being laid off when the company suffered its first losses in its history. Many businesses go through such upheavals because they fail to anticipate drastic market share losses.
When faced with a loss making situation, a decline in sales or a decline in your market share it’s time to consider adopting some turnaround strategies. Peter Drucker, an American management consultant and professor once said “The greatest danger in times of turbulence is not the turbulence, it is to act with yesterday’s logic” or not to act at all. Business leaders need firstly to identify that their company is sick and needs to be attended to urgently.

How can you identify a “sick” business? When you see a business that is losing market share, experiencing a decline in profitability or has incurred losses in the previous accounting year, and in the current year and is likely to incur losses in the coming following years or is heavily dependent on debt then know that such a business is getting into serious trouble. You need to come up with turnaround strategies to rescue the organisation.

The main causes of “industrial sickness” could be entrepreneurial incompetence, financial problems, intense competition, or production problems impacting on quality or unfavourable Government policies or lack of raw materials. All these issues can push a company into a serious loss making situation which, if not attended to, can lead to bankruptcy.
It’s therefore imperative for a company to embark on a turnaround strategy. Turnaround involves restructuring a loss making company into a profitable one. It is aimed at reversing the trend of declining performance of a company. Turnaround is a long-term strategy which requires proper planning and implementation to convert the loss-making unit into a profitable one. It’s a lengthy and time consuming process.

There are three phases in turnaround management. You need firstly to carry out a diagnosis of the problem faced by the company, that is, identify the root cause or causes of the crisis.
This could be revenue downturn caused by a weak economy, poor strategic choices, poor execution of a good strategy, high operating costs or high fixed costs that decrease flexibility, a highly successful competitor who has entered the market or it could be an excessive debt burden. All these could be causes of the loss in profits.

Once you have analysed the probable root causes and if there are prospects of turning around the situation, you’ll need to come up with a number of strategic options and then choose the appropriate turnaround strategies from those options. The following could be some of the strategies that one can adopt after a careful analysis: you could change top management, retrench excess staff, adopt all round cost cutting measures, implement some revenue generating strategies, divesting from underproductive assets or a reformulation of the current strategy. These initial strategies are intended to bring the company back into a profitable situation.

Once you have achieved profitability you can then adopt the second phase of the turnaround which basically involves a return-to-growth or recovery stage. The turnaround process now shifts away from retrenchment, cost cutting, revenue generation to growth and development and a growth in market share. This can be achieved through the introduction of new products, or entering new markets, or through increased market penetration.

Corporate Renewal Solutions (CRS), a black economic empowered management consulting firm based in Johannesburg, South Africa came up with a turnaround management philosophy which revolves around short-term survivability while endeavouring not to compromise longer-term turnaround viability.

The whole process involves: identifying the causes of distress, assessing the severity of the financial crisis and the number and nature of internal and external constraints faced, drawing up short-term turnaround strategy to lift the company from a loss making situation, ensuring that the strategies get stakeholder support.
Once you have implemented the short term strategies, you then move on to drafting longer-term turnaround strategies that will move the company towards its vision.

Implementation of the turnaround strategies is very key. Anyone appointed to carry out the process of turning around an organisation requires the support of all key stakeholders. For an organisation to move from a loss making situation it needs to change. Albert Einstein, one of the most significant scientific geniuses of the 20th century, said “Insanity is doing the same thing over and over and expecting different results.” You need to change the way you have been doing business if you have to turn around a failing business.

l Stewart Jakarasi is a business and financial strategist and a lecturer in business strategy (ACCA P3), advanced performance management (P5) and entrepreneurship.
He is the Managing Consultant of Shekina Consulting (Pty) Ltd and provides advisory and guidance on leadership, strategy and execution, corporate governance, preparation of business plans, tender documents and on how to build and sustain high-performing organisations.

For assistance in implementing some of the concepts discussed in these articles please contact him on the following contacts: sjakarasi@gmail.com, call on +266 58881062 or WhatsApp +266 62110062 .

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