TURNAROUNDS AND EXPANSIONS
Business Development Specialist
It may seem odd to combine turnarounds and expansions in a single article. One connotes trouble and the other opportunity but they are surprisingly similar. Both a turnaround and an expansion involve the same activities organized in the same order to bring them to a fruitful conclusion. But let’s start with some basics. A turnaround is defined as either a marginally profitable business or one facing imminent failure. An expansion is defined as a business with market opportunities and the resources to exploit them. The reason they require the same structured approach to succeed is that an expansion, in many cases, becomes a turnaround when executed poorly and with inadequate planning. Accomplishing the turnaround activities before implementing an expansion typically eliminates the turnaround. In broad terms the sequence of tasks to accomplish in both a turnaround and an expansion are:
- Getting Organized in a Planning Notebook
- Solving the Cash Crisis
- Building Information Resources
- Setting Goals
- Addressing the Influence of Behavioral Issues on Decision Makers
- Creating Efficiency in Systems
- Refocusing the Marketing
- Establishing Long-term Financing
Why is this, the correct sequence for success? Because a turnaround or an expansion accomplished in the wrong sequence creates inefficiencies and will actually hasten the failure of the business. Consider a business that is experiencing insufficient cash flow. It would be tempting to jump to Step Seven and create an all out marketing effort to improve sales, but without creating efficiency in systems in Step Six first, the manager has only burdened their inefficient systems, with more work. This typically forces the hiring of new employees. Implementing major marketing efforts before creating systems, overburdens existing systems and causes additional expenses, and ultimately lower cash flow, the opposite of the intended effect. So let’s start at the beginning.
Step One: It is essential for the manager to get organized in a planning notebook. The first section of the notebook is a Schedule of Critical Events that identifies the tasks to be completed for each turnaround/expansion Step. The remaining sections of the notebook look very much like any business plan and should be titled Company Goals, Marketing, Finance, Operations (systems), Personnel, and Legal Issues. As each turnaround/expansion activity is completed, the results go into the appropriate section. Results for cash crisis activities typically go into Finance, results for information systems go into Operations. Turnarounds and expansions are complex and to stay on track the manager needs the notebook to help them not only prioritize the turnaround/expansion activities but also to prioritize new information and activities and not get distracted. With the notebook organized, the manager can move on to the next step.
Step Two: Solving the cash crisis means moving all easy sources of cash into the current time frame. Activities here include raising prices, improving invoicing and collections, reducing inventory, renegotiating the purchase price of the business (if purchased on a contract from the previous owner), renegotiating loan terms, communicating with vendors and tax agencies to extend payments, reducing all costs that can be reduced and much more. Some remarketing to exiting customers can be done but major marketing efforts should be left until later in the process. Getting short term cash into the business buys time and provides resources to accomplish the next task.
Step Three: Building information systems gives you the data you need for decision making and means getting your accounting system in order, creating cash flow projections, creating productivity measures, creating customer tracking systems, beginning market research, and visioning the cost structure at various sales levels. The first major mistake in all expansions is thinking you can be profitable at all sales levels. You can’t. Expenses take stair step leaps when fixed costs for employees, square footage, and equipment are incurred to support new sales. This creates a deficit until sales reach the new breakeven point. Expansions become turnarounds when the business is caught under a stair step and uses up its cash assets before that breakeven point is reached.
Step Four: With enough cash and information you can set optimum goals for sales and profits, and outline in detail the tasks required to meet those goals. You will already have the information resources to track your projections against reality and make adjustments to your plan before serious problems occur.
Step Five: Turnarounds and expansions come unraveled when steps are completed in the wrong order or when left incomplete. One of the most difficult steps to complete is addressing the influence of behavioral issues on decision makers. Managers are people like everyone else but the success of the business depends not only on their skill but also on how they behave. They may have an abrasive non-collaborative style; be unaware of others needs; or suffer from an untreated disorder like depression, bipolarity, or narcissistic personality disorder. Any of the behaviors that arise from these issues can alienate good employees but more importantly can influence the judgment of the manager. Critical decisions need clear critical thinking.
Step Six: Creating systems should be a team effort but it is usually left to individuals. Many processes are established with little thought to efficiency because the individual who creates them has an immediate need to accomplish some critical task. Because the business is faced with daily immediacies, these systems are rarely questioned after the fact, and cause escalating inefficiencies as sales grow. Process redesign solves these inefficiencies one at a time by involving all the individuals who interact with a system to identify its costs and functions; and then improve communication, speed, and accuracy, remove redundancies, and reduce costs.
Step Seven: Up to this point the market research started in Step Three has been ongoing. With the market research completed the manager can fine tune product/service lines to better satisfy the customer and more effectively compete in the marketplace. Now the turnaround/expansion plan is ready for funding and implementation in a controlled manner with enough feedback to correct mistakes as they happen.
Step Eight: Establishing long-term financing at the end of the process guarantees the funding will be used to its greatest effect. Only the products with proven value will get funding, and in the right amounts.
The turnaround/expansion process can be arduous but the rewards are equal to the effort. Get organized, and get the results you want.
Douglas Hammel is the principal Business Development Specialist with Douglas Hammel & Associates Inc. located in Olympia Washington. He consults with a wide variety of businesses in the greater Puget Sound area and can be reached at (360) 584-4075, firstname.lastname@example.org.
Copyright © by Douglas Hammel 2006