1. Turnaround Forecasting is About Reality, Not Wishful Thinking #015
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 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 recently helped by business
restructure and turnaround company K2 Business Rescue, 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 prepared by K2 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.
K2 CEO Tony Groom says that 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.

2. Turnaround forecasts, says Tony Groom, 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.