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Risk Management: Secrets of the Turnaround Pros

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When companies find themselves up against the ropes, they often turn to specialists who come in and make the tough decisions and critical negotiations to help them get back on their feet. But your business doesn’t have to be nearing failure to take advantage of such turnaround techniques. By tracking a few key indicators and preparing your company for the worst, you can create a more resilient and sustainable organization.

Heed the warning signs.

Your company’s early warning system should focus on cash flow, a leading indicator of trouble down the line. Too many companies let their accounts payable lag. Instead, they should be taking action immediately.

“I’ve had companies approach us for help for the very first time when they realize they won’t be able to make payroll the following week. Why do they wait so long? It would have been obvious that things were bad long before reaching that sort of crisis. The problems are so much easier to fix when you catch them early,” says Meagan Hardcastle, managing partner at Birmingham, MI-based consultancy Harmon Partners.

Other clues include customers taking longer to pay, inventory building up, and even an uptick in shipping costs due to expedited freight. That often means there is a backup somewhere, whether it’s receiving components from a supplier, a production slowdown, or quality-control issues. Hardcastle also recommends watching what’s going on with vendors, suppliers, and competitors. If any of them become financially stressed, your business could be next.

Clean up your books.

Too often, Hardcastle says, meaningful analysis is all but impossible because a company’s books are not properly maintained. Keeping proper records of money going in and out of your business is a critical practice in keeping an eye on the overall health of your company.

“The old adage ‘garbage in, garbage out’ applies,” she says. “When we dig into the books, we often find expenses getting dumped into the wrong accounts and other sloppy practices. These need to be corrected to get a true picture.”

Analyze profitability.

One of the critical functions Hardcastle’s team performs immediately with clients is analyzing profitability to determine what’s making money and what isn’t. The method of doing so varies by the type of business. “So if you’re a widget manufacturer, we might go product by product. If you’re a service provider it could be by service line or geographical location. And we always look at profitability by customer,” she says.

She recommends getting as granular as possible: what are your revenues and direct costs for each unit? Did you overlook concealed costs? Are your products underpriced? Are you using vendors that aren’t cost-advantaged, or offering a key customer an unprofitable discount?

“Our clients are often very surprised to find that they’re not making money on products they thought were profitable,” she notes.

Reduce your Risk Exposure.

Finally, you should take a step back and determine where you may be vulnerable to unexpected downturns. Customer and supplier concentration are common problems. Diversifying both your customer base and suppliers can protect your revenue stream and supply chain from disruptions caused by a single customer or supplier. Another important consideration is data risk, both in terms of protecting sensitive customer information and making sure your own critical data is safe with a solid IT infrastructure, redundancies, and backup strategies.

“A lot of what we do for customers boils down to risk management” Hardcastle says. “You want to be aware of your potential vulnerabilities, and address those in order to become more resilient.”

When things are going well, it’s easy to overlook potential trouble down the line. By taking the time to shore up your company’s defenses, you’ll be better equipped to weather the next unpleasant surprise.