How to Analyze The Reasons For Your Company Crisis

If companies get into a crisis, they should analyze its reasons. The aim is to restore liquidity and increase profitability.

Most companies do not want to know about the crisis and turnaround. If it went well for years, there could be a bad year or two. But it quickly turns into three or more years. Many turnaround situations arise. It is, therefore, often difficult to tell when it is available. The leading internal indicators:

• Sales and EBIT stagnate or decrease over two or more years
• Changes in markets (products or regions) are recognized late or not at all
• Loss of orders for core products or core services
• Loss of critical accounts
• High production costs in the benchmark
• Changes to customer requirements without the company responding appropriately, such as service, delivery times, costs, or customer complaints
• Unmotivated, frustrated, or poorly trained employees
• High performers leave the company

Possible external reasons for turnaround situations

There are also several external indicators from which turnaround situations can arise with high probability:

• Macroeconomic factors such as the economy, inflation, or interest rate developments
• Mergers or acquisitions of companies
• Removal of company parts (carve-out)
• Takeover or sale by private equity providers

Experience shows that there is usually no single trigger. Turnaround situations typically arise from a combination of factors that reinforce each other in the worst case. Such problems are recognized late mainly because management does not want to acknowledge the situation. Or cannot see because the controlling is insufficiently developing. Then the analysis of the current situation only provides insufficient information or relevant data too late.

Basic goals of a turnaround

Those facing such a starting position as a manager have often not done their homework beforehand. Turnaround situations are often associated with a change at the management level. Anyone who takes on such a mandate as a manager should closely examine his task and the general conditions because a turnaround can only succeed if the appropriate freedom of action.

The primary goals for the turnaround are clear and straightforward: it is about restoring liquidity, increasing profitability, uncovering the most critical problems and shortcomings, and quickly identifying possible improvements. It is only in the second step that long-term viability is ensured.

Capture the market potential and actual customer shares

To grow in a consolidated manner, it is also essential to grasp the real market potential and basic customer shares right from the start. If there are real opportunities here, the prerequisites for a turnaround are not insufficient. Requirements:

• The supervisory board, banks, owners, trade unions, and employees grant the responsible manager extensive decision-making freedom for the next six to twelve months.
• The company has sufficient residual mass to cover the first six months.

The analysis of significant external and internal factors helps first to get a first overview. It’s about getting a quick overview. A lengthy, complete investigation is not required. There may be time for this when the company is back on track.

Analysis of external factors in the turnaround

Finances

Overview of the company’s financial position (creditworthiness, exchange rate development)

Market

• Market assessment
• Market slump (how much?)
• Rising pressure on prices and performance (impact on customers?)
• Change in the competitive situation (why?)
• Fall in demand (causes?)
• Technological change (effects?)
• Development of key accounts

Operations

• Problems with delivery dates
• High purchase prices Analysis of internal factors in the turnaround Finances
• liquidity
• Equity ratio
• Interest charge
• Forms of financing
• Material cost analysis
• Larger private withdrawals

Management

• Expertise in core processes and strategic decisions (wrong strategy, handling critical information)
• Leadership style

Operations

• Quality (how many problems cause extra effort?)
• Process analysis
• Bad investments
• Inventory analysis
• Lead times

Staff

• Loss of relevant employees
• High personnel costs
• Salary model
• Suspected embezzlement

Distribution

• Pricing policy
• Order structure

When checking the throughput times, an intensive factory inspection, the assessment of processes, the age and the maintenance quality of the machines, the cleanliness in operation, and compliance with recommended regulations.

In turn, it can check the order structure through discussions with the sales department, current customers, and companies that have chosen the competition.

Everything you track down can be solved, neutralized, avoided, tackled, or protected. You won’t find any problems and grievances a latent threat to the restructuring and may even jeopardize growth.