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What is Business Turnaround?

At some time or other in their organizational life, most corporations experience downturns in performance. Most corporations fight the downturn and get on high-growth tracks. We call this process, a business transformation. Some corporations, however, remain stagnant and are caught in a vicious status quo, while a significant few fail in the competitive combat and start declining and distressing; they soon degenerate into a cash crisis mode, eventually becoming insolvent, file for bankruptcy, and some die. The process of reviving these corporations and making them viable again is traditionally called a business turnaround.
<ref>Mascarenhas, Oswald (2007), Business Turnaround and Transformation Management</ref>

The Current Phenomenon of Business Failures

Currently, we are witnessing high turbulence in large and small corporations. Bigger companies, in particular, are failing more frequently and with gigantic losses. Of the 20 largest U. S. bankruptcies in the last two decades, 1985-2005, ten occurred in 2001-2002. Corporate earnings are more erratic. Even perennially successful companies are finding it more difficult to deliver consistently superior returns. Companies like Disney, Ford, General Motors, Daimler-Chrysler, Hewlett-Packard, Motorola, Nordstrom, and Sony – one time “built to last” companies <ref>Collins, Jim and Jerry I. Porras (1997), Built to Last: Successful Habits of Visionary Companies. Harper Business. </ref> <ref>Collins, Jim (2001), Good to Great. Harper Business.</ref> – are just about performing around the Dow Jones Industrial Average <ref>Hamel, Gary and Lisa Välikangas (2003), “The Quest for Resilience,” Harvard Business Review, (September), 52-65.</ref>, or, are just failing. High CEO turnover in large corporations is becoming commonplace (e.g., Delphi, Ford, Hewlett-Packard, Gateway, and K-Mart). With imminent threats of junk bond ratings, leveraged buyouts (LBO) or hostile takeovers, the Wall Street financial analysts and investor sharks are exerting all-time high pressure on corporate executives to perform. Corporate boards and shareholders are increasingly demanding higher financial returns on investment (ROI), on equity (ROE), on assets (ROA), net worth (NW) and higher earnings per share (EPS) and price-earnings (P/E) ratios.

Possibly yielding to such pressures, corporations have been recently indulging in unusual business practices such as creative accounting, creative cash flow reporting, aggressive accounting, overstating earnings, earnings management, income smoothing, and, in general, fraudulent financial reporting. Under whatever name, these unusual activities are a financial numbers game <ref>Mulford, Charles W. and Eugene E. Comiskey (2002), The Financial Numbers Game: Detecting Creative Accounting Practices, John Wiley & Sons, Inc.</ref> or financial shenanigans <ref>Schilit, Howard M. (2002), Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Financial Reports, 2nd edition, McGraw-Hill.</ref> with a singular ultimate objective – creating an altered impression of the firm’s business performance. Presumably, most of these practices fall well within the flexible rules and boundaries of the generally accepted accounting principles (GAAP).

These questionable practices have tangible and intangible rewards, including approval of Wall Street analysts, improved credit quality, improved debt ratings and reduced interest costs on borrowed capital. They can create additional slack and reduce restrictions on debt covenants. They have definite positive effects on share prices such as higher share prices, reduced share-price volatility, increased value of stock options, lower cost of equity capital, and increased market evaluation. Additionally, they can boost profit-based bonuses and other corporate benefits. Nevertheless, they all mislead and misreport financial results that appear in corporate official financial statements that investment bankers, investors, creditors and shareholders read and on which they base their investment decisions. When some insider whistle- blows or external financial analysts discover and expose these fraudulent acts, the companies undertake several “adjustments,” often restating financial statements of prior years.

Unfortunately, the investor public comes to know of these acts too late – that is, after investment-decisions have been made and share prices have fallen precipitously <ref>Mulford, Charles W. and Eugene E. Comiskey (2005), Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance, John Wiley & Sons, Inc.</ref>. Accordingly, corporate frauds and, hence, corporate failures leading to bankruptcies, have ever been on the increase, reaching all-time highs in 2001-2002 <ref>Forbes Magazine (2002), “Recent Accounting Frauds,” [1952] July 25.</ref><ref>Fortune Magazine (2002), “Recent Corporate Scams,” September 2, 64-74.</ref>. Fraud experts, fraud auditors and forensic accountants estimate that the costs of white-collar crime average about twenty times the costs of street crimes each year <ref>Singleton, Tommie, Jack G. Bologna, Robert J. Lindquist and Aaron Singleton (2006), Fraud Auditing and Forensic Accounting: New Tools and Techniques, 2nd edition. John Wiley & Sons.</ref>.

Business Turnaround Management as Rescue and Transformation Strategies

In general, a failing business poses two main problems:

1.