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Published on 14 November 2010by Tony Groom

Turnaround Forecasting is About Reality, Not Hope

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 is more oriented towards improving cash flow than making future profits. Low

expectations are set so that the business does better than forecast, especially if the

business is looking for 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

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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 in reality rather than hope and incorporated into the medium term is the

effects of what fundamental change is being made in the short term as in the case

of installing the three-phase electrical system in the factory unit rather than paying to

reinstate supply in another unit to cover a short period before that unit was to 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. This level of detail is needed in turnaround forecasts along

with the cost of terminating leases and agreements so that the consequences of any

decisions to terminate costs is known before making them. This line by line approach

is not normal in most forecasts as the contingent cost of terminating agreements is

rarely considered.

Turnaround forecasts are more than just the cost of terminating agreements and the

cost savings that are 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 illustrates why a company embarking on a turnaround process is making a big

decision and needs a real understanding of 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.

K2 Business Rescue The Emergency Service for Business

Call Tony Groom on 0844 8040 540

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