This "Turnaround Checklist" was created with the intention to help business owners in analyzing their business position, and to be able to make the right choice regarding their
Business Turnaround Checklist
Viability of The Business
While evaluating the business it is important to identify essential and important issues for the business’s survival. You should identify the internal strengths and weaknesses, as well as the business’s external threats and opportunities
The main purpose of this initial evaluation is to establish the viability of the business for the medium to long term, and that the core product/service of the business has potential for future growth, expansion and profitability
If the business doesn’t have a viable core product or service, as the competitive position of the business is essential to the decision whether a business can be turned around or not. Without a viable core product/service a turnaround in most cases is highly unlikely. Is the product or service near the end of its life cycle? For example, is the business still in the typewriter market, or is the business still pressing out seven singles, how viable or competitive is your product out in the market?
1. Is there a market for your product/service?
If the answer is no, go back to the drawing board. Start over. Because no matter how great you think your product is, if no one needs it/wants it/buys it, you don’t have a business.
2. Can you make a profit?
Have you done the number crunching to ensure profitability? If not, go back and work your numbers. Figure out what you need to charge to make your profit on each item or service you sell. See what the competition is charging. Be in line but don’t necessarily be the cheapest. Your products may command higher fees (better ingredients, exciting packaging, snob appeal). Or you may choose to be the low price leader — but you’ll need more volume than you would at the high end. In any event, do your homework.
3. Can you survive?
Do you have the resources to see you through until your business starts to show a profit? If not, you may need to keep your day job and do this on a part-time basis initially.
Determine Business Solvency
Before you start implementing your business strategy successfully you need to determine the business solvency. It's important to know that you are legally required to present accounts to show a true and fair picture of the business, and if the business is insolvent you must act to maximize creditor’s interests. Here is a basic test that you can use to determine if the business is
Solvency, is a business ability to meet its debt obligations on a short term and long term basis.
The Balance sheet test: Do you owe more than you own as a business or are the business’s assets exceeded by its liabilities? Do you or another partner owe more than you own personally? (It is important to know that it should include contingent or future liabilities.)
The Cash flow test: Can the business pay its debts when payments become due? If your business can't pay expenses, employees, creditors, or Income Tax for example, then the business could be insolvent.
Solvency ratio, or Debt-to-Equity Ratio is generally a good indicator of a business long-term sustainability. It measures the long-term debt of a business in relation to its assets or equity. The Debt-to-Equity Ratio is calculated by dividing a business total liability by its equity. These numbers are available on the business balance sheet of the financial statements.
The formula to for Debt-to-Equity Ratio: Debt / Equity = Total Equity / Total Liabilities
Note: If a creditor has obtained a Judgment against either the business, partnership, or an individual, this may demonstrate the businesses, individual or partnership may be insolvent and the creditor may petition to issue bankruptcy proceedings.
Stages of Financial Distress and Turnaround Strategy Option
Now it is time to look at the different "stages" of financial distress your business may be in. This helps to choose the right turnaround strategy to enhance your ability to adapt, adjust and execute. The good news is that most businesses in distress can be saved if the necessary corrective actions are implemented within a clear and defined business turnaround plan.
Early detection of financial distress
Recommended Turnaround Strategy: Stabilizing the business finance, maintain positive cash balance while optimizing performance & profitability.
- Declining profitability
- Decreasing market
- Cash flow restrictions
- Declining revenue/sales
- Increasing costs/overheads
- Increase in outstanding accounts payable
- Loss of competitive edge
- Declining stock levels
Medium to high financial distress
Recommended Turnaround Strategy: Optimize performance & profitability, asset reduction, working capital refinance, investors and effective out-of court workout settlements.
- Optimize performance & profitability, and
- Effective out-of court workout settlement.
- And asset reduction, working capital refinance, investors
- Struggling to pay long term debt
- Debtors days extensions
- Struggling to pay creditors/suppliers
- Non-payment of tax returns
- Behind on payments to the Landlord
Late critical financial distress – Business Rescue
Recommended Turnaround Strategy: Business rescue and wind-down (Liquidation or Merge with another company)
- Business rescue and wind-down (Liquidation or Merge with another company)
- Pending litigation by creditors
- Unable to meet obligations to debtor-holders
Determine Financial Health of a Business
No single metric can accurately determine the financial health and sustainability of a business. Therefore, a number of financial ratios must be considered to gauge a business overall financial health. First was the business Solvency test, now we will look at the business Profitability and later at the short-term cash survival.
The best measurement of a business health is its profitability, NOT profits, because profits can be deceiving. A business can survive for years without being profitable if it keeps operating on the goodwill of creditors and investors until it runs out of money.
To survive in the long run, a business must eventually become profitable. Profitability is a rather simple concept but not easy to accomplish. You don’t need to be an MBA or accountant to know to make more profit, you only have to increase sales and reduce cost. But if it was that easy, every business will be successful, no business will fail and every body will be making a fortune. But the reality is 60% not profitable and up to 80% fail in 5 years.
The two best methods to measure a business profitability is by measuring the Gross Margin Ratio, and the Net Margin Ratio.
Gross Margin Ratio
Gross Margin Ratio also known as Return on Sales measures how much Gross Profit a business makes, measured in percent. It also indicates how many gross profit a company makes on every dollar of sales, after paying for all variable costs related to the sales, production and services, and before deducting any general Fixed Cost.
Formula for Gross Margin Ratio: Gross Profit Margin = Total Sales − COGS / Total Sales
Net Profit Margin
Net Profit Margin is the key ratio of profitability. It measures what percentage of revenue earned by a business ends up as net profit. By comparing net profit to total sales, investors can see what percentage of revenues is available to pay shareholders or reinvest in the business.
Formula for Net Margin Ratio: Net Profit Margin = Net Profit / Total Revenue
It is crucial to measure profitability in percentage ratios and not in dollar amounts, because a dollar figure of profit is inadequate to evaluate the business profitability and financial health. The business might show thousands even millions in net dollar profits, but when these profits represent a net profit margin of only 1% or less, the business is at risk.
When a business net profit margins are that small, no matter how much the dollar amount, even the slightest increase in Fixed and Variable operating costs or a slight drop in total sales due to an increase in competition or down economy could plunge the business into large amounts of money lost.
A larger net profit margin on the other hand means greater financial security and health, and also the business ability to growth and scale operations. After you have determined the profitability of the business you can move to the next step - short-term cash survival.
Short-Term Cash Survival
Determine short-term cash survival whether the business has sufficient cash to see it through the next cycle (3 months), a survival plan where funds are generated internally for quick cash generation is needed:
- Does the business have sufficient cash to see it through for the next few months?
- Can stock be sold out or returned to suppliers?
- Can collection from accounts receivable be improved?
- Can payments to creditors be extended with the correct arrangements?
- Can possible short-term financing be acquired?
- Determine whether banks and other vested stakeholders will assist.
A good indicator to determine the business ability to pay its short-term obligations is to use the Current Ratio formula. The Current Ratio compare a business current asset to its current liabilities and show how well a business can maximize the current assets on its balance sheet to satisfy its current debt and other payables.
Formula for Current Ratio: Current Ratio = Current Assets / Current Liabilities
Another good indicator to determine the business ability to meet its short-term obligations with its most liquid assets is the Quick Ratio, also called
What Issues Need Attention Immediately?
Once the short-term cash survival evaluation is complete, you need to decide:
What issues need to be attended too immediately? For example, how can funds be generated immediately within the business?
What issues need to be attended to in the short term? For example, what possible short-term financing is required.
What issues will be attended to in the medium to long term? For example, look for new outlets and markets for the products/services on offer, or develop/improve new products/services.
What components of the business should remain the same? For example, all core profit-generating items to remain. No large projects undertaken in the short-term.
Are Stakeholders Ready To Support The Business?
Making sure that everybody fully understands the situation, and committed to solving the problem. This may include employees, suppliers, partners and everybody that are stakeholders in the business.
Team Support – Support from all key team members is necessary. Get shared commitment to action between employees and owners/partners. When a business is in crisis mode the owner and staff need to be in harmony and in step with the needs of the business.
The right results come from the right people doing the right things at the right time in the right way for the right reasons." When all your team members are not committed to your business mission, vision, and values, they are also not committed to executing your goals. You not only need to show people what direction the company is headed in, but you need to get them to "buy into" this direction. Great success is almost always the result of great teams. An aligned team always out-performance an individual.
Commitment - Everybody should help play his/her part in saving the business, but this won’t help if the owner doesn’t lead by example. Commit to your new way of operating. It's easy to make plans to change but it's another thing to actually carry out those plans. Success is a result of action based on planning. It’s quite obvious that things need to change, but the question is do you ‘have to’ change?
Different Actions - Recognize that getting different results requires a different course of action. If you simply keep doing the same things, you’ll get the same results. To expect anything different without changing the way you operate is insanity.