Managing a successful turnaround even in tight capital markets: the team navigating a turnaround must go way beyond reducing headcount alone and focus on seven steps to change the company's direction and improve its cash flow and profitability.

• Author: Rojas, Carlos
• Position: Strategy

Today's businesses are operating in a tighter capital environment, one in which investors no longer have the appetite--nor ability--to fund several years worth of operating losses. Some companies have invested in organizations and infrastructure anticipating market demands that have not yet materialized; others have experienced explosive growth beyond their ability to manage profitably; while still others are operating with inadequate financial and operational controls.

With this as backdrop, many companies are finding it necessary to radically change direction and strategy to improve profitability--often resorting to layoffs alone, when much more is needed. What follows are seven key actions for successfully changing a company's direction and improving its cash flows,

1. Control Cash

   A management team attempting a turnaround must get a firm grip on cash disbursements and receipts. To begin, the CFO or controller must identify all disbursement mechanisms and ensure that no payment occurs without their knowledge and consent. Understanding the cash outflows enables the turnaround team to identify potential areas for cost reductions. It also sends the message to the organization: It is not business as usual, and the old spending patterns and capital projects must be re-evaluated.

   Often, expenditures that remain "in the pipeline"--from earlier times, when capital was more plentiful and growth projections more liber al--present an outstanding opportunity to save cash. And while such attention to disbursements may slow the accounts payable process, gaining a quick understanding of the business and its cash flows is vital and worth a temporarily lengthier A/P cycle.

   In one turnaround engagement, a daily expenditures meeting was held with the department vice presidents, where expenses and capital outlays were approved. The first 30 days were quite intense--with requests coming in for additional expenditures on cancelled projects. Well-intentioned managers believed the spending was necessary to wind up the projects, and the meetings provided a forum for discussing necessities, given the company's new realities.

   Some expenditures were approved--those that were consistent with the company's long- and short-term needs. Over time, the need for meetings decreased as managers "took up the cause" and actively sought opportunities to save cash. Through the executives' efforts, the company reduced monthly operating expenses 46 percent over a one-year period.

2. Evaluate Accounting and Financial Reporting Systems

   Every business needs accounting and operational data disseminated to its management team in daily, weekly, monthly and quarterly reports. Failure to produce or distribute management and financial reports is a significant internal...