When a company gets into trouble, the instinct is often to put a finance person in charge. Because ‘trouble’ frequently comes with a pound sign.
On the face of it, that makes perfect sense. The business is losing money, cash is running out, suppliers aren’t being paid, the bank is getting nervous and HMRC may be starting to take an unhealthy interest. Who better to sort out a financial crisis than an accountant?
Except the financial trouble may be the symptom of the failure, not the cause of it.
And that’s where I have a problem with putting accountants in charge of business turnarounds.
Accountants are trained to understand businesses through numbers, reports, budgets, variances, controls and financial outcomes. Those things matter enormously, particularly when a company is in trouble.
But they aren’t the business.
A failing company absolutely needs an excellent finance person. It needs somebody who can establish exactly how much cash it has, where that cash is going, what it owes, what it can afford and how quickly it’s running out of road. It needs reliable management information, proper cash forecasting, credit control, creditor management and financial discipline.
But that’s only part of a turnaround.
There’s a dangerous leap between accepting that a failing company desperately needs financial expertise and concluding that the person providing it should therefore be the person deciding how the company is rescued.
The numbers aren’t the business
Almost everything that goes wrong in a company eventually turns up in its accounts.
Lose customers and revenue falls. Price badly and margins deteriorate. Run an inefficient operation and costs increase. Buy the wrong equipment and return on capital suffers. Manage people badly and productivity declines. Let service deteriorate and customers leave.
Eventually, almost every management failure becomes a number.
Which makes the numbers tremendously useful. But the numbers tell you where the business ended up. They don’t necessarily tell you how it got there.
And they certainly don’t always tell you what to do next.
That’s an important distinction when a company is failing, because if you treat the financial consequences as though they are the problem, the obvious response is to attack the numbers. If costs are too high, cut them. If headcount has increased, reduce it. If margins are too low, increase prices. If working capital is poor, squeeze it. If capital expenditure is too high, stop investing.
Every one of those decisions might be completely correct. But every one of them could also make the business worse. They’re the tired responses of accountants and corporate management consultants who have been reaching for the same turnaround toolkit for decades.
Because the actual problem might be somewhere else entirely. Perhaps the company has been pricing work incorrectly for years. Perhaps Sales is rewarded for winning revenue that Operations cannot profitably deliver. Perhaps productivity is terrible. Perhaps managers aren’t managing. Perhaps the wrong equipment has been bought. Perhaps customers no longer particularly value what the company sells.
Or, much more likely, several of those things are happening at once and interacting with each other. Either way, understanding the financial consequences isn’t the same as understanding the causes.
The spreadsheet can balance while the business falls over
I once took over the running of a business in fairly serious financial difficulty. Cash was extremely tight and suppliers were being paid very late, sometimes extraordinarily late. There wasn’t much science behind deciding who got paid either. Broadly speaking, suppliers who shouted, swore or threatened the loudest tended to find themselves nearer the front of the queue.
The FD quite reasonably wanted to bring some discipline to this. One week he produced a report listing around 50 suppliers, how much each was owed and which ones he intended to pay from the cash available. He knew how much money we had and the proposed payments broadly matched it.
Arithmetically, it worked perfectly. Operationally, it would have been catastrophic.
One of the suppliers he wasn’t proposing to pay was a principal outlet for waste leaving the site. If they stopped accepting our material, the yard would start backing up almost immediately. Within a few days we could potentially have breached our permitted storage limits, attracted the attention of the regulator and ultimately found ourselves unable to operate.
Another was the tyre supplier. We operated a large fleet of commercial vehicles. If the tyre company stopped supporting us, vehicles would progressively start coming off the road. Vehicles sitting in the yard don’t service customers and vehicles that don’t service customers… don’t generate revenue.
And revenue was something we rather desperately needed.
Meanwhile, another supplier could be making considerably more noise about its overdue invoice while presenting almost no immediate threat to our ability to trade.
The problem wasn’t with the arithmetic. The problem was the question being asked.
It wasn’t simply “Who can we afford to pay this week?”
It was “What must this business remain capable of doing next week?”
Paying the tyre supplier wasn’t simply settling a creditor. It was protecting future revenue. Paying the waste outlet wasn’t simply reducing accounts payable. It was protecting operational continuity, regulatory compliance and ultimately our ability to keep trading.
Of course the numbers still mattered. They established the absolute constraint. If we had £200,000 available, we couldn’t pay £500,000 to suppliers however operationally important they all were. But the spreadsheet couldn’t be left to decide how that £200,000 should be deployed.
A list of creditors tells you who you owe money to and how much you owe them. It doesn’t tell you what happens to your business on Wednesday if you don’t pay one of them on Monday.
That requires an understanding of the business behind the numbers.
Financial restructuring isn’t business turnaround
There’s a distinction between financial restructuring and business turnaround.
A seriously distressed company may desperately need both, but they aren’t the same thing.
Financial performance can sometimes be improved surprisingly quickly. Recruitment can be frozen, headcount reduced, discretionary spending stopped and projects cancelled. Maintenance and capital expenditure can be deferred, stock reduced, suppliers stretched and assets worked harder. If the company is weeks away from running out of cash, some of those things may not merely be sensible, they may be unavoidable.
But there is an enormous difference between doing those things to create the breathing space in which a business can be fixed and believing that doing those things is fixing the business.
You can make today’s numbers look considerably better by storing up problems for tomorrow. The machinery you didn’t maintain still needs maintaining. The capable manager you removed may have been the person quietly holding an operation together. The marketing you stopped may appear as a sales problem six months later. The supplier you’ve stretched beyond reason may eventually decide they don’t particularly want your business. The investment you’ve cancelled may have been essential to improving productivity.
But the cash position improves. EBITDA improves. The board pack looks considerably less frightening.
Except you’ve been quietly burning the furniture to heat the house.
That’s why I become nervous when cost reduction and turnaround are used almost interchangeably. Cost reduction may be an essential component of a turnaround. But it isn’t the turnaround.
A company isn’t rescued because it has become cheaper to run. It is rescued when it has become capable of succeeding again.
Looking busy isn’t the same as changing the business
There is another trap struggling companies fall into once somebody declares that a transformation programme is underway.
Suddenly there are workshops, away days, organisational reviews, new reporting structures, revised job titles, steering groups and an enormous action plan. Every month another collection of activities is marked complete and the percentage in the corner moves reassuringly towards 100%.
Some of that may be useful. A failing business often does need clearer responsibilities, better information, different structures and stronger management processes.
But none of it necessarily means the business itself has become any better.
A new organisational chart doesn’t improve productivity. Changing somebody’s job title doesn’t make them more capable. An away day doesn’t fix a broken commercial model. A transformation programme isn’t successful because you’ve completed all the actions in the transformation programme.
A turnaround plan can be 80% complete while the business is still 100% broken.
The real questions are harder.
Has the company become better at what it actually does? Is it making better decisions? Are customers receiving a better service? Is productivity improving? Has the company reduced the dependencies that make it vulnerable? Are the things it produces actually worth producing?
Those questions are much harder to put a green tick beside. They’re also considerably more important.
A failing business is a system
This is where turnaround becomes much messier than financial restructuring, because you have to understand how the business actually works rather than merely how its performance appears in the management accounts.
You need to understand what customers buy and why, where money is genuinely made and lost, and what happens between Sales making a promise and Finance eventually sending an invoice. You need to understand the operational dependencies nobody has written down, find the good people hidden inside the mess, work out which processes are broken, which rules are stupid, which behaviours are being rewarded and which long-established assumptions stopped being true five years ago.
Most importantly, you have to recognise that a company is a system.
Management accounts make organisations appear beautifully divisible into departments, budgets, cost centres, revenue streams, headcount and overheads. But businesses don’t really operate like that.
Imagine a processing company that has become extremely good at putting material through a plant. Production costs are under control, throughput is improving and the operational KPIs are heading in the right direction.
There’s only one slight problem: nobody particularly wants what comes off the other end.
That isn’t simply a problem for whichever manager happens to be responsible for selling the output, and it certainly isn’t solved by demanding another 5% improvement in plant productivity.
It’s a problem with the business.
Perhaps the inputs need to change. Perhaps the processing strategy needs to change. Perhaps different markets need developing. Perhaps customers need charging differently. Perhaps the company needs different technology. Perhaps the market has moved and something the business was designed to produce no longer has the value it once did.
The important point is that you cannot optimise Production independently from the market for what Production creates.
The same applies throughout a business. Sales affects Operations. Operations affects Transport. Transport affects Customer Service. Procurement affects operational reliability. Maintenance affects productivity. Customer service affects retention. Management affects almost everything.
Finance eventually records the consequences of it all.
If Operations says it has hit its production target, Sales says it has hit its revenue target and Finance says margin is still deteriorating, you haven’t necessarily got three departments doing their jobs successfully.
You just have one broken business model.
The thinking has to change too
Some accountants become superb operators and business leaders precisely because they learn to see beyond Finance.
At some point, the successful finance leader stops seeing Finance as the lens through which the rest of the organisation is understood and starts seeing the whole business as an interconnected system. Their financial expertise doesn’t disappear. It becomes one particularly powerful component of a much broader way of thinking.
That’s the transition that matters.
A good accountant understands the numbers. A good operator understands the business behind the numbers. A great business leader understands how changing one influences the other.
That’s a very different capability from simply being good at Finance.
The best accountant-turned-operators haven’t abandoned the discipline their financial training gave them. They’ve added commercial judgement, operational understanding, curiosity about customers, people and processes, and an appreciation that apparently rational decisions in one part of a company can produce completely irrational outcomes somewhere else.
In other words, they’ve escaped the silo.
And that’s important because turnaround leadership eventually has to confront a question much bigger than how to make the existing business perform better.
It has to ask whether the existing business is still the right business.
Markets change. Technology changes. Regulation changes. Customers change. Assets that once gave a company an advantage can become the very things preventing it from adapting. Products and services that once generated attractive margins can become commoditised or obsolete. In those circumstances, becoming 10% more efficient at doing the wrong thing isn’t a turnaround.
The turnaround leader’s job isn’t merely to make the existing business perform better. It’s to decide whether the existing business is still the right business.
That might mean abandoning activities the company has performed for decades. It might mean writing off an investment everybody desperately wants to justify. It might mean changing customers, markets, operating models or capabilities. It might even mean deliberately making today’s financial performance worse in order to build a company capable of performing much better tomorrow.
Those aren’t decisions you can make simply by looking harder at last year’s numbers.
Finance belongs at the heart of a turnaround
None of this is an argument for keeping accountants away from troubled companies. Quite the opposite.
If I walked into a seriously distressed business tomorrow, one of the first people I’d want beside me would be a very good finance professional. I’d want to know the real cash position, not the optimistic version everyone had become accustomed to discussing. I’d want a credible short-term cash forecast. I’d want to understand debtors, creditors, margins, liabilities, commitments and working capital.
I’d want Finance challenging my plans, testing my assumptions and telling me when the business simply can’t afford what I want to do. Once changes were underway, I’d want them measuring whether the improvements expected were actually appearing in the numbers.
That’s an enormously important role. But it is just part of the turnaround.
Finance establishes some of the constraints within which decisions have to be made. It provides evidence about whether those decisions are working. It exposes problems, challenges assumptions and prevents an enthusiastic turnaround leader disappearing over the horizon with a brilliant idea the company cannot possibly afford.
But somebody still has to decide what the business actually needs to become.
That requires combining the financial picture with operations, customers, people, suppliers, assets, markets, regulation, commercial strategy and risk. Sometimes it requires deliberately making a decision that makes today’s numbers look worse because it gives the company a much better chance of existing tomorrow.
And sometimes it requires recognising that the apparently obvious financial solution is treating the symptom while making the disease worse.
Rescue the business, not just the balance sheet
Perhaps that’s why some corporate rescues can look so convincing initially. Costs fall, cash improves, headcount comes down and EBITDA starts moving in the right direction. The patient appears to be recovering.
Then, twelve or eighteen months later, the same underlying problems start appearing again.
Because nobody actually fixed them.
You can rescue a balance sheet without rescuing the business.
So when I say accountants can’t rescue failing companies, I’m not making a blanket judgement about everybody with ACA, ACCA or CIMA after their name. Some accountants make superb business leaders. But I suspect they do so because they’ve learned when accounting stops providing the answer and when they need to think differently.
The “accountant” I’m talking about is anybody who believes that because a company’s failure eventually manifests itself financially, its recovery can therefore principally be managed financially.
It can’t.
The numbers matter enormously. Financial discipline matters enormously. When cash is disappearing, both can become matters of survival.
But survival is only the first part of a turnaround.
Because a failing company doesn’t merely need better numbers. It needs to become a better company.
About Gerald Price
Gerald Price is a business change consultant and interim managing director specialising in business turnarounds, operational improvement and commercial performance, especially within the waste and recycling industry.
Having worked with operators across the sector, he regularly writes about leadership, strategy, waste policy and the commercial realities facing UK waste businesses.
More articles and insights can be found at www.gpcp.co.uk and https://www.linkedin.com/in/geraldprice/
