Turning around a failing business- A pragmatic approach

Turning around a failing business- A pragmatic approach

by anil

Many SMEs believe in an infusion of more funds to revive the failing business. The fact is the solution lies beyond money.

In the previous blog, we analysed a business in cotton ginning business, which went into distress in just two years of its inception. We identified the reasons for failure are poor thought process and absence of detailed planning at the beginning, lack of internal control, poor quality control at the procurement stage which is the key success factor in the cotton ginning business, lack of oversight by the family elders over scion of the family who leads the business, etc.

Please read: “I want to shut down by two-year-old venture because it is a failure”

The business came to complete halt and CEO was asking the family elders for fresh funds to begin purchase of raw materials. However, there was no guarantee that the situation will reverse.

Looking at the spectre of failure, that too developed so fast just 18 months from the date of inception, the elders were planning to shut down the business and sell the same at slump price.

The question is: is it the right solution

The enthusiasm with which they started their new business eventually sobered down, and even disappeared when they confronted with pain to see their business crumbling. The sales are dwindling, it is incurring operating losses and debt is increasing.

Unable to find a solution, they were contemplating the idea of quitting the business.

However, at the back of their mind, they are unwilling to give up because the business has potential. It is located in one of major raw materials hub. Secondly, the family has been into textile business for decades. There was no constraint of finance, a common concern for many in that segment.  The gap is somewhere else beyond all these.

Looking for new money- An obvious priority:

I have come across many instances of promoters look to new funds to rejuvenate their distressed business. The urgency to raise more money can be attributed to pressing demand from creditors, need to pay off statutory dues, clearing salaries, mounting arrears in the bank etc, which are commonly observed symptoms during such difficult periods.

At the first instance, the firms seek restructuring of debt with Banks to salvage the situation and avoid recovery action.

Whether new money alone will revive the business?

No, Not at all ….!!!

Money is not a panacea for turning around a distressed business. There are many instances where more debt only compounded the grave situation and pushing the borrowing entity further deep into distress. At times, more debt means the lesser ability of the firm to return to revival.

The roadmap for the revival of ailing business:

Ailing if allowed unaddressed; it will lead to deterioration of assets, loss of market share, loss of reputation, blocking of capital, among others. More importantly, it will make the life of the entrepreneur and his immediate family miserable.

The firms undergoing the challenging situation should approach the turnaround very methodically and before the situation aggravates. More time you spend on building a plan, better the chances of finding a pragmatic solution to the challenge.

We suggest the following steps to fix the problem.

  1. Diagnose the situation

Companies fail for a variety of reasons, such as poor business planning, ineffective management, an unsustainable business model or a bad economy. There are several reasons that can affect the performance of any business. Identifying the problems is the first step to finding a viable solution.

The sources of pain for stressed business may be different. However, they fall into any one or more  of the following categories, namely:

a) Industry Scenario: The challenges in the larger industrial/sectoral level such as inputs related, competition, and regulations impact the business. The solution may be addressing the challenges by modifying/ changing the products or processes, capabilities,  is required.

b) Business operations: Re-assessing firm’s sustainability and stability to withstand adverse business conditions. It includes the business fundamentals of the company, the characteristics of the industry it operates, its competitive market position in the industry and its operational efficiencies.

In the instant case, we found that there was less attention paid to the procurement of cotton. Efficient and effective procurement of quality cotton at an affordable price is the key success factor for the cotton ginning industry. However, it was not given enough serious attention.

c) Managerial Capacity: Any firm’s performance is significantly determined by the management goals, plans and strategies, capacity to overcome unfavourable conditions, skills and capabilities required and how the entrepreneurs have hired human resources.

Here in the case under study, we observed that CEO did not have any prior experience in this line and he could not figure out the key risks, the company had been exposed to till it reaches severe liquidity stress. The procurement side was manned by people of poor skills and doubtful integrity. There was no proper oversight of their actions.

d) Financial Performance: It comprises analysis of sales, profitability, balance sheet structure and cash flow in relation to projected one as well as industry norms. This throws hints on areas of deficiency and corrective actions required to be taken,

List out the reasons or sources of distress and analyse the magnitude of their impact. That will help in the prioritisation of corrective actions.

  1. Seek the help of professional advisors:

 At times, when your analysis fails to give you an idea about the reasons for failure, talking to people outside the business can help. Secondly, since the outsiders do not have the familiarity of the processes and people, they will be able to shed the light on the challenges in an unbiased manner. Since they are working with many other firms and having been armed with skills to deal with challenges, they will provide support to discuss and take bold decisions to revive the business.

Way forward….

List out the key reason for the failure of business and explore the remedies. Draw a roadmap for removing the wrong practice, policies, products, people etc based on the outcome of diagnosis with the assistance of advisors.

Turnaround is a tough job requires one to take bold decisions because it means course correction. Pumping more money will not solve the mess. Thoughtful approach and meticulous adherence to plan to resurrect the business is very important.

Distraction in the way is too many, at times it can be emotionally challenging like stepping aside from the job in favour of turnaround professional, sacrificing privileges, firing people, relocating offices etc.

That is part of any restructuring exercise. It is worth bearing with because it will save the family from the bankruptcy and is rewarding in the long run.

Conclusion:

The business undergoing distress craves for more money to sustain the operations. Money alone is not enough. Stressed business requires undertaking corrective actions in many other areas to return to normal.

Further reading:

Please read: How to achieve successful turnaround post debt- restructuring?

Anil Kumar Shetty, Founder- SME Advisors

We advise on the turnaround strategy for SMEs among the other services.  

 

 

 

Leave a Reply

Your email address will not be published. Required fields are marked *