Business Turnaround: What Are Your Options & Should You Cut Your Losses?
If your business is struggling financially, you want to be clear on what your options are moving forward. If you act early and at the first signs of financial trouble, you could well be able to return your business to profitability. In this instance, one of the options you may have is business turnaround.
What is business turnaround?
Business turnaround is the process of preventing a financially unstable business from going into liquidation. The process involves analysing the root cause of the financial problems and responding to them through the implementation of recovery strategies aimed at stabilising the business. The ultimate goal is to make the business profitable again.
Turnaround vs rescue
A similar term that you may have come across in relation to these issues is ‘business rescue’. Whilst they both have the same goal of rehabilitating struggling companies, it’s important to note that business turnaround is different to business rescue. Whilst business rescue is a statutory governed process aimed at seeking relief from creditors to whom the company owes debts, turnaround is not statute governed and therefore led internally by business directors. You can read more about the process of business rescue here. For now, let’s take a closer look at what a turnaround process entails.
What is the turnaround process?
The process of a business turnaround is aimed at improving management, profitability, cash flow, productivity and revenue. Whilst the process will vary depending on the requirements of the individual company, any business turnaround plan will include the following broad stages:
Assessment and review
The first stage of business turnaround is to thoroughly identify the problems within the business, looking at what’s causing them and defining the main areas of financial stress. This will involve looking in detail at the company’s finances, infrastructure, operational procedures and people. This is crucial for preventing further decline and for determining the correct strategy for recovering the business.
Preparation of a realistic plan
Once the underlying problems within the business have been identified, business directors will work to develop an achievable recovery plan. The plan will be communicated to all key stakeholders within the business, as well as to external parties, including creditors and essential suppliers.
Implementation
Once agreed by all key parties, business owners can start to implement the recovery strategies. Depending on the plan, this may include making redundancies and reducing all non-essential costs. Initially, the focus will be on stabilising the company by creating a positive cash balance. Once the business has been stabilised and removed from a state of emergency, attention can be turned to increasing profitability. This is important for ensuring the long-term health of the business.
Maintenance and review
Once the strategy is being successfully implemented, it’s important that the business continues to review progress in order to ensure continual improvement as well as to identify any issues that need to be corrected immediately. Identifying issues early on is essential to preventing financial problems from becoming irreversible.
Is business turnaround an option for my company?
Business turnaround is a realistic option for companies that are in the relatively early stages of business decline and financial distress. Before planning a business turnaround, business owners need to assess their company’s financial situation in order to determine if a turnaround plan has a realistic chance of success. This will involve weighing up the business’ assets, losses and debts.
If it is unlikely that the company will be able to return to profitability, but the company is still solvent, the best option may be to voluntarily liquidate the company via a Members’ Voluntary Liquidation (MVL). This is the best way for solvent companies to liquidate the business and extract assets in the most tax efficient way.
If the company is insolvent, business turnaround won’t be an option and the company will need to be liquidated. A Creditors’ Voluntary Liquidation (CVL) is the best way to liquidate a company that cannot pay its debts. This removes creditor pressure quickly and ensures the company is wound up correctly so that business owners can trade in the future.
If you’re unsure whether or not business turnaround is an option for your company, or, if you would like to discuss alternative options that are available to your business, please don’t hesitate to get in touch with our experienced team today.
