Thought Piece

Most business people have heard this saying and at one time you couldn't meet a banker without being told it. Of course in many ways it is right: manufacturing huge sales without producing profit and not collecting the cash is just mad. But on the other hand for businesses in trouble every pound of revenue has to be seen as a sign that the business is producing a product or service which someone is actually prepared to buy.

Turnover also gives companies some breathing space and some choice over their action; in other words it shouldn't be knocked.

In essence you have to distinguish between bad turnover — the vanity sort —and good turnover which is value enhancing. And it can be quite difficult to spot sometimes. For instance working with one client we realised that if they could sell more, even at cost, the overall profit of the company would rise substantially. Why? Because if they purchased a greater volume they could successfully negotiate a greater discount. So in that case, selling at a low margin was OK because the key driver was securing the volume to achieve the discount.
I have seen it the other way round as well: one client — a reseller of enterprise software — when asked for its top 10 clients was confident it had the answer to hand. However it struggled when challenged to quantify the profit it made on each of those. Eventually it did the sums and discovered that three of them were losing a substantial amount of money. Because these were seen as important clients they had enjoyed such great discounts that they were damaging the bottom line. That turnover, perceived as good, was anything but.
All the years I have been working with companies, I have always found it possible to increase sales. The more difficult part is to ensure you are doing that in the right way. And that is where gut instinct has to be shelved in favour of analysis based on fact.

Banks are not charities. But they do calculate the lifetime value of the customer and they understand the reputational risk to themselves of the slash and burn exercises they are sometimes accused of.

That brings us to the role of the banks, so often the largest creditor and certainly the one with the most intimate knowledge of how a company is faring. We all love a stereotype and the heartless, faceless bank pulling the plug on sound businesses over a minor blip sits deep in the business consciousness. But not all banks fit this caricature. "We want to work with management of a business facing difficulties to help identify the issues and provide solutions to get them back on track," says a senior manager with a leading retail bank. "We can make the most impact when the problems are identified early. We are keen for management to be open with us."

Banks are not charities. But they do calculate the lifetime value of the customer and they understand the reputational risk to themselves of the slash and burn exercises they are sometimes accused of. Most solutions to business difficulties involve access to more funds and/or different products (hedging, leasing, factoring) and that all adds up to continued and profitable involvement for the bank.

A Repositioning Turnaround may mean divestment of a troublesome subsidiary. It may mean embarking on (yet another) cost-cutting exercise, including turning away revenue opportunities if they are not of a sufficiently high margin. It most certainly involves a first step of getting an impartial and pragmatic overview of what the problem actually is, from Turnaround Professionals who also know the kind of language with which to talk to banks. The moment you take this kind of decisive action, you're likely to discover that there's no crisis, no drama, only urgent action that must start now.

Peter Charles 2010