Warning Signs and Strategic Response
Over several months, she observes troubling signs: revenue streams are drying up, expenses are mounting, and the company's debt load is becoming increasingly burdensome. Susanne knows that if these trends continue, the company could be facing insolvency in the not-too-distant future. It is time to act. She needs a strategy to reverse the downward spiral and maintain the company's survival. To navigate through the financial turmoil to secure the necessary liquidity is needed. This is not easy because of dwindling cash reserves and mounting debts. There's a real possibility that the company may run out of funds to meet its obligations. To address this risk, Susanne focuses on shoring up short-term liquidity by renegotiating payment terms with suppliers, prioritizing accounts receivable collection, and exploring alternative financing options.
Then there are as well other problems, such as the erosion of customer confidence. Unfortunately, sales have also fallen and getting new customers is increasingly difficult, especially when reputation takes a hit. This requires rethinking customer segments, as well as modify marketing and sales activities. She needs to act quickly, before the company runs out of funds to pay for wages, rent, and utilities.
This scenario is all too common for many organizations, both large and small, particularly in today's uncertain economic climate. Many companies, despite appearing financially stable, face latent or acute risks that could lead to a crisis.
Understanding Turnaround Management
Systematic approach to reversing the decline of an organization and restoring it to profitability is called turnaround management. Unlike other management strategies that focus on increasing sales or reducing costs, turnaround management requires a rapid and disciplined response to address the root causes of an organization's struggles.
While cost-cutting measures may be necessary, turnaround management also involves addressing underlying issues such as stagnant growth, ineffective leadership, flawed business models, or cultural problems. By implementing a comprehensive turnaround plan, leaders can stabilize the organization and establish a new strategy to prevent future difficulties. Ultimately, the goal of turnaround management is to create a sustainable and successful future for the organization and its stakeholders.
Critical Questions for Company Survival
While turnaround management may seem like a distant concern, companies must ask themselves tough questions to realize how critical it is for their survival. These questions can be:
Are costs growing faster than turnover?
- Is the main competitor's growth greater than your own?
- Have there been more enquiries from banks about the company's creditworthiness recently?
- Have there been any delays in payments during the last period?
If the answers are yes and can be observed over several periods, it is possible that the company may face financial distress.
Factors Influencing Effective Risk Management
This is where the importance of effective risk management becomes apparent. When it is done well, it is much more than guessing what may go wrong. The following three factors in particular influence the effectiveness of risk management:
Minimizing Negative Risks while Incentivizing Positive Opportunities: While it's essential to minimize negative risks, it's equally important to incentivize positive opportunities. By considering both the potential downsides and upsides of different strategies, leaders can make more informed decisions and achieve better outcomes.
Balancing Risk Tolerance with Cost-Effective Mitigation: Similarly, a low risk tolerance can lead to unnecessary mitigation efforts that may not be cost-effective. Managers should specify whether certain mitigations are economically feasible.
Dealing with Limited Data and Historical Analysis and Expertise: The impact of limited data should not be underestimated. Historical data and expertise should be analyzed in detail. They reassess the projected durations and costs of activities, questioning the underlying assumptions.
The Critical Role of Risk Management in Building Organizational Resilience
The Federation of European Risk Management Associations (FERMA) and McKinsey recently published a report emphasizing the critical role of risk and insurance managers in building organizational resilience. (Source:https://www.ferma.eu/publication/the-role-of-risk-management-in-corporate-resilience/).
Survey Insights on the Importance of Risk Management and Resilience: The survey reveals that over 90% of respondents believe that risk management and resilience have become more important due to the global pandemic. More than half of the participants reported a considerable or great increase in their importance.
Prioritizing Resilience in Strategic Decision-Making: Additionally, over 60% of risk managers view resilience as a top priority or highly relevant in strategic decision-making.
The Future of Risk Management and Resilience: Looking to the future, almost three-quarters of the risk managers surveyed see a need to strengthen their organizations' risk culture and integrate resilience more strongly into their strategies. This suggests that organizations must prioritize building a risk-aware culture and integrating resilience to effectively respond to future challenges.
Actionable Steps for Turnaround Professionals
Effective and comprehensive risk management is an important instrument of resilience of any company. To avoid further deterioration and restore value for stakeholders, management or turnaround professionals must take action to turn the business around and restore its cash-generating capacity.
Strategies of turnaround management can be beneficial for a wide range of organizations, including those that are underperforming, experiencing rapid growth, or facing unforeseen financial losses.
Underperforming organizations: These strategies can help organizations identify and address the root causes of underperformance, whether it's an outdated operating model, ineffective leadership, or other issues. By implementing a comprehensive turnaround plan, organizations can improve their performance and achieve sustainable growth.
Rapidly growing organizations such as successful startups, may also need turnaround management to address cash flow crises or other challenges that come with rapid scaling. Turnaround strategies can help these organizations establish more efficient processes, strengthen their financial management, and ensure long-term success.
Organizations facing financial losses: Even healthy organizations can face unforeseen financial losses that threaten their stability. Turnaround management can help organizations navigate the crisis, stabilize their finances, and establish a plan for recovery.
Effective risk management, financial controls, and data-driven decision-making are critical to navigating these challenges and ensuring long-term success.
Whether your organization is underperforming, growing rapidly, or facing a financial setback, turnaround strategies can help you navigate the challenges and emerge stronger than before.
