Normally most forecasting is done for lending, fund raising or other investor related purposes and therefore with hope of future growth built into the forecast. Such forecasts show how loans will be repaid and investors will achieve a return on their money. Such forecasts are often not achieved being more about hope than reality.
On the other hand, a turnaround forecast must be achieved and ideally exceeded and are more oriented towards improving cash flow than making future profits. Low expectations are set, so that the business performs better than the forecast, especially if the business is seekin g support from the bank or additional finance that tends to have expensive penalties for failure.
Therefore turnaround forecasting will deal with a level of detail where a turnaround business plan is essential. So the turnaround forecast is used to show the pre-turnaround business model, and then the costs of implementing the turnaround and then the post-turnaround business model. Indicative growth may be shown but the focus of forecasting is to show that the post-turnaround business is viable, normally without relying on growth.
To illustrate this take the situation of a company that has shrunk and no longer needs two factory units and is looking to consolidate into one to reduce premises costs. The less expensive but ideal unit needs three-phase electricity installing to operate the heavy equipment that is in the second unit, but the electricity supplier has switched off the power in that unit due to an overdue account.
The cost of reinstating the existing supply, however, is similar to the cost of installing the new three-phase supply. The turnaround forecast showed a significant cash saving if the move was brought forward by investing in the three-phase installation which both cut premises costs and saved the cash that would otherwise have been needed to pay to reinstate electricity as well as install the three-phase.
The focus on cash helped make this decision, the profit and loss benefit helped justify it and the electricity supplier liability was bound in a CVA (company voluntary arrangement). It challenged the orthodoxy that not spending money is going to save money whereas investing a little now could save a lot later.
The essential point is to distinguish between short term and medium turn benefits and a turnaround forecast is looking at cash flow in the short and medium term rather than looking at profit and loss which tends to be the focus of most forecasts. It is dealing with reality rather than hope, and incorporated into the medium term is the effect of that fundamental change being made in the short term, as in the case of installing the three-phase system in the factory unit instead of paying to reinstatethe supply in another unit to cover only a short period before that unit would be vacated.
The forecast which separated all costs relating to each factory unit was detailed and showed additional savings beyond the rent and rates, including insurance, CCTV, security and inspections. Turnaround forecasts need this level of detail along with the cost of terminating leases and agreements in order for the consequences of any decisions for terminating costs are known before they are made. This line by line approach is not normal in most forecasts as the contingent cost of terminating agreements is rarely considered.
Turnaround forecasts are about more than merely the cost of ending agreements and the cost savings expected to follow. Like redundancies, the cost of terminating employment is one factor, the future savings is another but also and often crucially it is the impact of the decision that needs to be built into a forecast. This shows why a company embarking ona turnaround is making a big decision and needs to really understand the detail.
This is where the business rescue adviser’s guidance can be invaluable. Not only do they have a broader range of experience they have the in-depth knowledge that comes from working on rescuing a wide variety of enterprises covering a multitude of activities, along with direct experience of the workings of the court systems, detailed knowledge of business models, accounting procedures, managing cash flow, employment issues, lease arrangements and many other aspects of running a business.
When working with a company they have the opportunity to get into the detail in a way that its owners have probably never had. All of this detail needs to be incorporated into a turnaround forecast. Such detail is drawn from reality, actual contracts and actual orders, and not from hope.
Writer Ali Withers talks to business turnaround adviser Tony Groom from K2 Business Rescue about the difference between “ordinary” forecasting and turnaround forecasting and discovers that the former is about hope, the latter about reality.
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