Business Survival Series: The Most Important Questions for a Business to Answer on Day 1 of a Turnaround
A business turnaround is about getting a business moving in the right direction. Survival is the hopeful outcome of any turnaround process. Survival is a change in the challenged business for the better. It is the process by which a business in financial crisis is transformed into a viable entity.
It can be difficult at the beginning of a turnaround for business owners to focus in on the important questions. So, when business owners face the potential insolvency of their business, they should go back to first principles:
These questions are important because they help business owners focus their attention on impact issues and will help you narrow in on an optimal business strategy. Remember, strategy for a small-to-medium sized enterprise (SME) is not just about what you do but about choosing what not to do. Once you answer these questions, you’re off to a good start.
Before jumping in to answering these questions, it is helpful to be clear about what we mean by a ‘turnaround’ and what ‘survival’ is in this instance. A business turnaround is about getting a business moving in the right direction. Survival is the hopeful outcome of any turnaround process. Survival is a change in the challenged business for the better. It is the process by which a business in financial crisis is transformed into a viable entity.
With this in mind, let’s turn to the important questions.
Question 1: What is most important to the customer?
A business will need to zero in on what their customers want and need. If your business does not service those wants and needs, it will struggle and will be vulnerable to competitors that actually do understand the customer. Thriving doesn’t necessarily mean better service – just a more focused service.
But finding the right customers and identifying what they want is not always easy. Most businesses go through 3 stages of identifying customers. They start by thinking everyone is a potential client. They then choose a specific market to sell to based on what others in the market are doing. Eventually businesses find a market that actually serves their business. But to reach this end, you need to understand what your business wants and what it needs. It would be helpful to develop a customer avatar to help you outline and acknowledge the needs of your customers and in turn address those needs. When you understand your market, it is worthwhile spending time prioritising those customers and nurturing those relationships.
Once you have identified your best customers, get to work on understanding what is important to them. The goal is to understand why they shop for your product or service and their preferred methods of doing so. You should also understand their spending habits and what they think of your offerings. Use this understanding to tailor your products and/ or services to your customers and therefore maximise your profits. Also use this information to help you engage in market segmentation (ie. dividing your customers into sub-groups based on shared characteristics). This will assist your business in providing key benefits to your best clients and will ensure that any price changes or expense reductions are not destroying your customer base.
This process of learning more about the customer is important in focusing your attention on what matters most. According to author and entrepreneur, Gary Keller:
“It is those who concentrate on but one thing at a time who advance in this world.”
The key to success isn’t doing more; it is doing a few things really well. Your business may just do one thing really well, but for SMEs, doubling down on this could be the key to a successful turnaround.
This is substantiated by the Pareto Principle, which outlines that 80% of outputs come from 20% of inputs. According to the Pareto Principle, 20% of your customers are likely providing 80% of your profits. If this is the case, you need to focus on that 20% to get the most out of your business and any turnaround process. This is especially important for SMEs that only have limited time and resources to utilise. We recommend that you find out what that 20% of your customer base finds important. There are a range of things your customers might consider important. For example:
Whatever the outcome of this analysis, any struggling business will be better off with more information at hand. Focusing your attention on the things that actually provide outcomes will help you get the most out of what you have and will ultimately ensure that you’re giving your business the best chance of survival.
Question 2: What drives productivity?
Productivity is a commonly used buzzword. We generally understand that productivity is good, but we need a more in depth understanding of what productivity actually means. Productivity measures the efficiency with which businesses convert their labour, capital and materials (input) into a product or service (output). This is essentially a test of efficiency.
How effective is your business at using your inputs to get to the greatest number of outputs possible? Is your business reaching its key performance indicators?
Answering these questions can be difficult, since measuring productivity depends on each business, and it can be even harder to measure when your business is experiencing a financial crisis.
The first step for business owners is to implement methods to measure productivity. There is no one method of measuring productivity. For example, time tracking and project management software may be appropriate for your business if outputs can be measured by time. Another business may opt to measure productivity by assessing profits generated. Productivity can also be measured by tracking how many individual tasks each worker is completing.
You will need to look at the multiple methods available and consider which one works best for you and your business. Your choice will be determined by the nature of your business and the specific productivity metrics you are trying to measure. You will also need to consider which method is actually viable for your business considering the resources you have available and what level of analysis your situation requires. Ultimately, you will need to consider the many choices and tailor any measurement method to the needs of your business.
However, if your business is in significant financial trouble, productivity may need to be addressed in a slightly different manner. A serious financial downturn probably indicates that there is a serious problem with your business’ productivity. In this scenario productivity becomes an issue that needs to be addressed immediately and the usual metrics might not give you the information you need to undertake a successful turnaround. Instead of focusing on productivity as purely units of output over units of input, you may need to assess your business’ productivity using different models to that outlined above. We suggest you look to the following:
- Prospect numbers:
- Ask yourself – what are the estimated outcomes across a range of categories including clients, revenue, etc?
- Your prospects will give you a good idea of where your business is heading in the short term.
- Consider these numbers and whether these projected outcomes will be enough to sustain your business. If not, make changes immediately.
- Client conversion rate:
- Ask yourself – what is the number of people considering your business versus the number of actual customers?
- If you are having trouble converting interested people into customers you need to address this.
- Perhaps there is a better way to channel you time, money and resources into getting the greatest number of customers to your business.
- Wasted staff efforts:
- Ask yourself – how much time is spent working on matters that never have an actual outcome?
- If your staff are spending a disproportionate amount of time on projects that go nowhere, they need to be redirected immediately.
- All inputs should have an identifiable output.
- Raw numbers of deliverables:
- Ask yourself – how many outcomes are being provided to clients?
- This metric is about how much output your business is providing directly to customers.
- If your input is not matching the deliverable outcome, you may need to reassess your process and find out where value is being lost in the process.
- Debtor days outstanding:
- Ask yourself – what is the average number of days it takes for an invoice to be paid after it is issued?
- Remember cash flow is often a symptom of insolvency, not a cause.
- If the payment of invoices is consistently delayed, you may need to assess whether there is a short-term cash flow problem or an endemic shortage of cash that may lead to insolvency.
- Management and organisational structure of the business:
- Ask yourself – is the business functioning internally?
- Effective internal management is necessary to ensure the company operates efficiently.
- If the organisation structure is too complex or unclear and management is not functioning effectively, you will need to address this before any other strategies can be implemented.
- Rate of growth:
- Ask yourself – is the company focusing too much on sales volume and not profit?
- Growth for the sake of growth is not always beneficial.
- Ensure your business is not growing at an unsustainable rate and that the business remains profitable even during periods of growth.
- Financial policy:
- Ask yourself – is the company’s financial policy clearly outlined and providing good outcomes?
- A high debt to equity ratio, a very conservative financial policy, the use of inappropriate financing sources or another financial policy could be causing or contributing to the failure of your business.
- Revise your financial policy to ensure it is clear, sufficiently responsive to the circumstances at hand and providing good outcomes for your business.
In a time of crisis, these are the real models that will help your business measure productivity. An assessment taking into account these factors will likely provide a more accurate picture of your business’ productivity during a time of crisis and therefore give you a greater understanding of the situation at hand. After reviewing these key measures, implement changes to boost the efficiency of your operation. A more efficient and productive business model is far more likely to make it through the turnaround process and come out the other side as a successful business.
Question 3: What drives profitability?
Profit = Income – Expenses
Identifying the elements of your business that drive profits will help you achieve the best results. If your business sells a product, start by identifying your biggest profit drivers. You can do this by making a list of all your products and then calculating how much time you spend creating each product. Then look to how many units are being sold and calculate the revenue according to the amount of time being spent on each product. Profit drivers will be those products that provide the most revenue, for the least amount of time.
If your business sells a service, start by listing all your service lines. Assess whether there are any service lines that are experiencing major problems or making a loss. Next, assess your business’ transaction frequency. If some services are too infrequently provided to customers to be profitable this should be noted and addressed immediately. Finally, look at your profitable leverage. Assessing your profitable leverage requires asking whether you, as the business owner, can delegate delivery to a staffer or does the service require your involvement. Using this information, evaluate which services are providing the most revenue for the least amount of time. These are your profit drivers.
Examples of profit drivers include:
- For a construction company, profits may be driven by its supply chain responsiveness.
- For a restaurant, profits may be driven by promotions and special offers that increase customer numbers or packages that increase the average spend of customers.
- For a manufacturing company, profits may be driven by digital sales.
- For a retail company, profits may be driven by optimising inventory levels.
In a turnaround situation, you will need to immediately terminate unprofitable products or services. This is a crucial, short-term tactic to stop haemorrhaging cash. Beyond this, you need to capitalise on your knowledge of profit drivers to help your company succeed. Rank your profit drivers from most important to least important in terms of their direct impact on your business goals. From here you need to shift your business to allocate more time and money towards the key profit drivers. Set up key performance indicators so you can quantify each profit driver and ensure that you are on the right track as you move forward. Whilst a turnaround is a relatively short (but difficult) process, analysis should be ongoing to ensure that your time and money remains focused towards a productive and efficient strategy.
Some key performance indicators that may be useful for SMEs include:
- Gross revenue
- Working capital rate
- Cash flow
- Growth rate
- Return customer rate
- Customer satisfaction
- Employee satisfaction
- Lead to customer conversion rate
You should also be engaging in other types of analysis. Firstly, you need to be assessing whether there is role alignment within your business. At a time of crisis, having the right people within your business is fundamental. Ask yourself – are your people best matched to their role and are you, as business owner, able to delegate? The right people need to be in the right role for a struggling business to survive. If you cannot rely on individuals or delegate to them when necessary, productivity and efficiency is surrendered. Cut the dead weight and double down on those employees that provide concrete outcomes for your business or at least make sure you have the right people in the right seats.
Alongside this, you should also engage in continual lifestyle alignment analysis. This involves the business owner asking themself – is this really what I want to do and does this help me achieve the lifestyle I want?
Mike Michalowicz points out that the “simplest method for setting purposeful business goals is to tie them to personal significance”. You need to assess what you want out of your business on a personal level, whether that be through a certain salary to support your desired level of comfort or to work a set number of hours in the week. Consider and set your realistic personal goals and then be honest with yourself about whether you’re willing to pursue these goals through your current business. This will help clarify the sacrifices you need to make to get to those personal goals. This is especially important in a turnaround situation. If you are not achieving your personal goals through your business then you are less likely to be committed to ensuring it survives. In a turnaround scenario, with this attitude, you are wasting your time and effort. If your business is not aligned with the lifestyle you want, pursuing it will not be worthwhile and likely unsustainable in the long term. Think about the business you are fighting for and whether it is worth the blood, sweat and tears required to save it.
You have answered the three questions… What next?
After answering the most important questions you need to start taking action. A turnaround requires radical rather than incremental change. Businesses that are about to embark on a turnaround process usually have significant problems that can only be overcome through fast, wide-ranging action. Understand that you will likely need to take significant action across the following areas:
- Crisis stabilisation
- Stakeholder support
- Strategic focus
- Organisational change
- Critical process improvements
- Financial restructuring
With this in mind, answer the above questions and get to work. Expect that the process will be difficult, but be confident that you have the information you need to embark on an effective turnaround, or at least make sure its worth the pain.