Turning the corner

MANAGING THE FINANCES IN A TURNAROUND:COMPANIES NEED to rework their ill-conceived strategies if they are to achieve turnaround, says one management expert.

Many companies that have now fallen into difficulty have done so because of the key assumptions that their business models were predicated on and which may no longer be relevant. That's the view of Accenture's head of strategy consulting, Anindya Roy. These assumptions, he says, included low interest rates, cheap transport, widespread consumer indifference to issues of sustainability and a large and enduring wage gap between emerging and developed economies.

The credit crunch is adding to the burden on such firms, he points out. "Companies that face shortfalls in cash flow are likely to fall into crisis mode faster and more irreversibly than in the past," he says.

"It's clear that companies need to reconsider their position and decide on their strategy for responding to changed circumstances."

The first step, he says, is to take stock and assess your exposure to the downturn. How is the downturn affecting your customers and what are the risks in your business model assumptions? Having a clear understanding of your current business and the outlook is critical, he notes.

For companies facing current or potential shortages in cashflow, de-leveraging and re-negotiating debt terms should be the top priority. To preserve cash, companies need to look at many options - divesting non-core assets, renegotiating business terms and cancelling all dividend payments are all good options.

Companies need to be very clear in their strategy to figure out what are non-core assets.

"The key here is to have a strategic view of cost reduction - a tactical across-the-board 'slash and burn' approach may generate immediate savings and cash, but companies risk cutting muscle instead of fat and jeopardise their future growth prospects," he says.

An intelligent approach to cost reduction has several characteristics, he says.

Overall, it needs to be driven by a clear understanding of the future operating model of what the company wants to be. It should be customer centric and ensure that the customer experience is not compromised. This forces the companies to ask hard questions about who their target customers are and what are their real needs.

Finally, it needs a balance of near-term immediate cost reduction initiatives such as corporate perks and supplier rationalisation, and longer-term, structural cost-reduction initiatives such as business re-modelling.

However, to be ultimately successful in the downturn, companies also need to look beyond survival, towards re-positioning for the future and growth, he says.

"Successful companies are those that do not stop at simply de-leveraging, cost reduction and cash flow maximisation.

"They are the ones that re-invest short term cost savings to fund focused initiatives for driving innovation, customer-centric behaviour and structural cost reduction initiatives," he says.