Recall the parable of the boiled frog: If you drop a frog into a pot of hot water, it will immediately leap out of danger. However, if you drop a frog into a pot of fresh water that’s cool and pleasant and slowly turn up the heat until it boils, the frog will remain blissfully unaware that there’s a problem, until it’s too late.
Likewise, many struggling businesses adjust to gradually deteriorating conditions and fail to make needed changes. What makes these companies so reluctant to ask for help? What are the signs to watch out for? And why could enlisting the aid of a turnaround consultant be the best decision struggling organizations ever make?
It’s OK to Ask for Help
No turnaround consultant has ever said, “It would’ve been smarter if you’d waited to call us.” And rarely do they say, “You called at just the right time.” It’s usually once the water has started to boil (running out of cash, losing customers, or experiencing serious lender fatigue) that the call is made.
Why do organizations wait? Many organizations feel they should turn things around themselves. Others don’t want to air their dirty laundry. Still others know what to do but can’t muster the will to make difficult decisions. They’re paralyzed by their pride and fear of change. Everyone, owners, employees, and vendors, pays the ultimate price.
Struggling organizations understandably are reluctant to pay professional fees. The price tag is a hard and fast number; the benefits can only be estimated, so they’re less exact. However, the return on investment in professional assistance usually occurs quickly, and lenders will support turnaround efforts.
The Warning Signs
When should organizations ask for help? First, if a business loses money one year and is beginning to lose money a second year, it’s important to seek help immediately. Banks will seldom support a company through a third year of losses.
Second, any downward trend in revenue or margin percentage, or any rising trend in overhead costs or materials or labor as a percent of sales, is a sign that organizations should seek assistance. If staying on trend means eventual failure, the trend must be reversed and the problem fixed, now.
Third, any deviation from the financial ratios banks use for covenants is cause for concern. Banks care about these indicators for a reason: They’re indicators of financial health or weakness. Companies should care about them, too.
Finally, falling customer satisfaction should be cause for alarm. How are customers responding to the company? Customer support is expressed in many ways, and if companies see customer enthusiasm waver, that’s a definite warning sign.
Turning Things Around
Once a company recognizes it needs help, it should next engage a turnaround consultant. The goal: to get the company to make money and have positive cash flow as quickly as possible, and to get time on your side. Companies continually losing money are continually worse off. Pressures from vendors persist, and lenders diminish and eventually go away.
The consultant will rapidly assess the situation and evaluate the immediate outlook for cash. Cash problems take first priority.
Next, the consultant will assess the company’s financial performance and outlook. If unfavorable, the consultant will look for root causes and rapid solutions and make improvements. Assessment normally lasts at most a few days and involves conducting onsite interviews, walking the floor, talking to personnel, and analyzing data.
Following analysis, improvement begins. Improvements can be financial (collecting past due receivables, restructuring debt, negotiating with vendors for better terms, and negotiating with customers), structural (dropping product lines or consolidating plants), or operational (changes in the shop floor layout, staffing, and processes and procedures). Operational improvements are particularly important; turnaround consultants work with staff to gather their ideas and empower them to implement changes rapidly.
A Real-Life Example
A $25 million a year manufacturer was losing money for more than two years. Its bank indicated that continued losses would mean an end to financial support and advised the company to seek third-party assistance.
An assessment was conducted that identified more than 100 potential improvement opportunities totaling $1.5 million in annual savings in manufacturing and process costs, revenue, and margin enhancement by cutting material costs, headcount, and administration. Rapid implementation created immediate savings. The company was profitable within 60 days of the start of the engagement. This success energized staff to make further process improvements, fostering profitability every month thereafter.
Don’t Let It Come to a Boil
Struggling companies can turn it around but only after recognizing the signs and asking for help early. Too often, companies wait until there’s a cash crisis before they seek help. Consultants can do more and are less expensive when they can focus on fixing the business vs. managing short-term cash crises.
Decision makers must overcome their reluctance to take difficult actions. Company leaders should pretend like the future of the universe depends on turning the company around. To business owners, their companies are their lives. It’s not too big of a stretch.
David Priestley is a consulting manager in Plante & Moran’s Restructuring and Operations Improvement Practice. He consults clients on financial restructuring, operations improvement, cost systems, and due diligence. He can be reached at 248-223-3405 or firstname.lastname@example.org.