Business lives getting shorter

In an article in the Sunday Times, Luke Johnson, chairman of Rick Capital Partners, says turnarounds need exceptional managers or ‘company doctors’ and a radical agenda – and not many are equipped for the job

First, why do many businesses fail in the short term, and virtually all in the longer term?

In 1950 the average life of a company in the S&P index was 47 years – according to McKinsey consultants, by 2020 it will fall to just 10 years

Reasons for this include:

  • Market share lost to new competitors or changing tastes
  • New technology making theirs outdated e.g. Kodak film versus digital cameras
  • Cash generation drying up
  • Diversification reducing focus on winning products
  • Fire, flood, fraud or customer bankruptcy hitting them
  • Lacking good controls
  • Building a grand office before a good business

Good managers avoid such problems becoming serious

Most, however, cannot do so – they bury their heads in the sand, many even deny the situation – they’re unwilling and/ or unable to do what’s needed – such managers ‘almost always have to be replaced’

So what do good company doctors do when brought in?

  1. Analyse the problems
  2. Produce a plan
  3. Execute the plan with vigour

Action could include:

  • Cutting loss-making products/ areas of the business
  • Cutting costs big-time
  • Eliminating unnecessary overheads
  • Reducing stock, especially slow-moving or overvalued
  • Raising cash for working capital
  • Renegotiating agreements with lenders and suppliers
  • Collecting debtors more vigorously
  • Increasing prices where feasible
  • Offloading and replacing ‘chaff’ management
  • Educating and energising remaining ‘wheat’ management

Such factors are within management’s control

However, there are others outside their control which could prevent any rescue efforts succeeding – new competition, technology or legislation for example

Overall, turnarounds are high-risk ventures – even the best company doctors fail with some of them at times

Better for existing managers to know how to avoid becoming yet another sad example

 

 

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