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Turnaround in 2012? 7 Nov 2011

Turnaround is an art. It even has its own trade body, the Institute for Turnaround. (Members can add the splendid letters MIFT after their names - which makes them sound perpetually discontented.) But the basics are familiar to every finance exec: cash and forecasting. I was chatting to two US CFOs in PE-backed businesses last week, and they were clear: right now, everything should be geared to free up capital in the business. That's not just cash - one of them pointed out that it was worth investing in HR systems to free up the "human capital" of managers from paperwork so they could concentrate on generating sales.

“We just have to forecast a lot,” added one retail FD. “Monitoring all the internal and external drivers is a huge job. With the unexpected shocks we’ve seen, it’s also impossible to anticipate and model for every eventuality. But you can still have a range of models that give you some visibility into different scenarios. And plan for the downside – until you can see clearly that you’re in a base case scenario or better.” That's true of all businesses, but many PE investors are on the edge of their seats right now and will reward proactive, accurate forecasting. Look at it this way: the general partner has limited time, and will probably be harassing the FC or FD who isn't showing they've modeled for a double-dip or a run on RBS.

Turnaround also demands hard talking - and an ability to hold fellow managers to account. "You must challenge the performance of the entire management team,” says serial PE FD Colin Bramall. “Done well and respectfully, it leads to a great working relationship. And if you’re a tight group, pressure for better performance strengthens the team, not weakens it."

Ironically enough, while many PE professionals expected lots of turnaround-related deal activity in 2011, it just didn't materialise. Generous payments terms from HMRC (although you still have to pay in the end...), banks letting so-so companies stumble on and a genuine improvement in the quality of financial management compared to previous recessions has meant fewer distressed sellers. Even without a lot of leverage, that's going to change in 2012. So one other aspect of turnaround for FCs and FDs: look for opportunities. When deals do pick up next year, there could be bargain opportunities to execute buy-and-build strategies for portfolio businesses with a sound enough plan to persuade their backers to fund M&A deals.

Bramall has one more lesson for FDs on that score: get agreat financial controller. “Ultimately, asFD, you can’t be distracted by the numbers issues the whole time,” he says. “You have to know they’re taken care of. It creates the headroom to let you fulfil all the other aspects of the role.” Which include planning the execution of the upside activities that a turnaround creates.