OPINION | Wednesday, 01 August 2007

Reuben Buttigieg

Financial Turnaround….and how to achieve it

The state of affairs of certain enterprises in Malta may be of concern. Although, the enterprises facing financial distress are of concern there are other things that are definitely not assisting these businesses.  The responsibility on whether these businesses with turnaround their financial position lies on not only the business person or the investor himself.
 Many of the Maltese businesses are in the retail and services sectors. One may argue that competition in these sectors is cut throat rampant while consumption seems to be getting more then ever before price sensitive.
Malta faced various radical changes in these last few years. Certain sectors and individual businesses fell short in facing new realities and adapting the necessary strategies to ensure to remain in business.

Causes of decline
There are various reasons for companies’ decline such as inadequate financial controls and high costs, new competition entering the market, unforeseen demand shifts, over expansion and poor management.
Higher costs, as declared by certain sectors, also institute a major factor, which is placing some companies into a competitive disadvantage. According to some, the increase in labour cost is hindering such competitive advantage, yet on the other hand we continue to hear discussion on family friendly measures, which will result in further costs to the employers. Although one might argue that the costs are relatively higher because the investment in technology is still relatively low.
Businesses, particularly micro businesses, still fail to understand the need of thorough financial control. Some may have had the necessary systems in place but their business grew beyond the capability of their original systems and costs spiralled out of control.
Over expansion could result in being a major issue. Companies and/or Groups that have expanded too far find that they are stretched in both managerial and financial terms. This was a major criticism in the UK viz a viz the diversification boom of the 1960s. Too fast a growth may also result in business failure
One may fall also into the trap of over confidence in his own abilities. This usually arises from a period of success, which causes an atmosphere of infallibility and screening of information. In some it might be purely poor management.
During the decline one must ensure that there is sufficient management talent.
 
Decline needs action
Various studies show that managers tend to initially deny there is a crisis on the grounds that the signals are an extraordinary factor. Others try to hide the reality by “massaging, delaying and even hiding figures”.
Unfortunately, hiding figures is becoming a major thing.  The first step is usually to ensure that the Financial statements do not show the true picture as otherwise the main source of funding, usually banks will start making call ins. To the profession’s dismay, certain auditors just contribute to this attitude. What one does not realize is that the business person is not being assisted in any manner apart from ensuring even more a down fall.
When crisis becomes too obvious to ignore there is usually  a reactive behaviour. Managers tend to react in a sequential way which may be perceived as taking the least risky actions first and then becoming progressively more daring if the crisis worsens.In certain stages, some apparently start building evidence and alibis and start looking for victims.
Financial and behavioural criteria need to be monitored for declining trends. Strategic health requires proactive management rather than reactive and false financial reporting.
In spite of the warning signs there must however be triggers to initiate action. Studies have identified a change in top management as a main trigger for change. Other triggers identified were intervention from external bodies, change of ownership, recognition by management of problems and perception by management of new opportunities.
Grinyer et al (1988) stated that: “When an organization is in this serious state, it is rare that a turnaround can be accomplished by the incumbent senior management – the ritual sacrifice of the old leader is almost obligatory”.
If a business has poor earnings it needs turnaround. The steps in the survival process are quite straightforward. Honest communication of the situation to the employees is essential. One needs however, to be positive, clear and candid about the situation and the objectives.  One would need to emphasise on what efforts and actions are expected from all. Then ask and listen for the input of the employees.  Pride or non-acceptance of reality may lead many to try to hide and/or cover facts which may in turn lead to degeneration of the situation.
In a typical turnaround one would have approximately a week to get organized and about three weeks to put a plan together. In a period of financial distress or in situations mentioned above it cannot be the management from within the enterprise to prepare such plan as it needs to::

Have one main objective;
Be realistic; and
Sustainable .
The first step towards such plan is the identification of  the problems and determining their sources and severity. It is critical to get the root causes whilst being careful of the temptation to address symptoms rather than causes. Strict accountability in such plans is a must.
The only expenses the company should incur are those necessary for the business to be profitable.  In fact 70 percent of the firms participating in a survey in the UK, state that the first action taken in turnarounds, is putting in place of stronger financial controls. In order to identify the unnecessary expenses one would need the help of the employees. Hence the importance of good communication with the employees as they need to understand the importance of such plan for the enterprise to be competitive, stay in business and safeguard their jobs.
The first challenge put to light by a troubled company is creditors’ persecution. There are various ways in which creditors can be addressed. The worst thing one may do is avoiding creditors or not returning their calls.
The examination of the creditors’ accounts is a must in a turnaround. One will almost certainly find errors in his favour. Having identified these one should ask for prompt refund and accept a credit note only if applied against already due invoices.
The cardinal rule of the troubled company is that customers, suppliers, banks and so on will benefit more from the company staying in business than from the closing down. So the troubled company has leverage. The only commandment is to negotiate with everyone.
 
Turnaround strategies
The above suggests the need of a turnaround strategy. Grinyer et al suggest a time ordering of actions to achieve a turnaround although not all organizations need to go through all stages. This will highly depend on the conditions of the company and the causes of the crisis.
There are basically five main strategy/stages for recovery that are:
 
Restructuring leadership and organizational structure;
Cost reduction;
Asset redeployment;
Selective market strategy; and
Repositioning.

We need to ensure that Maltese businesses are adapting themselves to the rapid changes that are happening in the world.  Malta has seen the vanishing of certain businesses and industries due to inappropriate strategies to face the changing environment.  Government has its own responsibilities in giving the direction to the country and in ensuring that the economy is in a healthy state to face such directions. Constituted bodies and professionals have various responsibilities in order to ensure that their specific sectors or clients are made aware of the risks that new realities open them to.  They also need to be encouraged to face and act upon such new challenges that can be turned into opportunities.

Reuben Buttigieg
Hon Treasurer – Malta Institute
of Management
Chairman – MIM Training Arm
Managing Director of Erremme Business Advisors