When companies need all hands on deck in era of extreme turmoil

Kenya and the world is undergoing a tough economic cycle with high interest rates and inflation.

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Kenya and the world is undergoing a tough economic cycle with high interest rates and inflation affecting the cost of doing business and the rates of consumption.

This is coming on the back of Covid- 19 aftershocks, supply chain dislocations, geopolitical turmoil, surging energy costs and volatility in local currency exchange rates.

This period of extreme turmoil has tested private sector resilience leaving businesses vulnerable. The toxic mix of headwinds have barraged businesses with multiple challenges forcing them to ask their financers, suppliers and sometimes even employees onto the negotiating table to restructure their commitments for their long term survival.

When a business undergoes a rough patch, the stakeholders in its ecosystem face the stark choice of whether to try and recover what is left of the enterprise, or to trust the long term vision of the business to weather turbulence.

But these conversations are never easy, remember the first inclination for the business is the profit motive and lenders, suppliers, partners just like any business are inclined to increase returns to their own shareholders. For them, restructuring may mean delayed anticipated incomes, which may impact their overall performance.

However, the alternative could mean default, and collapse of the business gutting their profits in provisioning, and draining more resources in litigation and recovery only to line up with a long list of claimants splitting hairs.

The most rational way out is to assess the pros and cons of alternative options to decide whether or not to save the business and most importantly how to safeguard value.

It will need courage to begin these conversations but they have to happen, bankers, suppliers and all creditors and business need to sit and look at the reality on the ground. The best bet is to seek for restructuring especially if the conditions are favorable.

If there is strong governance, a model or clear business strategy that is scalable, a strong management team able to execute, and finally, the key stakeholders or financiers aligned all through the journey to create a sustainable business, then it should be given an opportunity to rebuild.

This restructuring conversation will be the difference between companies that collapse and those that move from the brink of bankruptcy and closure to become the Apple, Netflix, General Motors and Delta Airlines of today, which recovered from a similar position.

While the four businesses mentioned above had different challenges, there is something we can learn from their approach to turning around these units into becoming the industry giants they are today.

First, is the need to really rethink the basic aspects of the business starting with the business idea itself and the business model. It is also advisable to review every single aspect of the business – just as if one was starting the business step-by-step from scratch.

The turnaround strategy is a result of finding out what went wrong and assessing the current situation, including the prevailing market environment. While putting together the plan, one has to put in consideration the important technological advancements, industry regulations and government policies that may work in favour of or against the direction a business wants to go as it seeks to turn itself around.

They may influence whether a business will venture into a new line of production or service offering, expand to a new market or even withdraw a product or service from the market. Management plays an integral role in turnarounds. Having a team with experience, deep understanding of operational and technical expertise goes a long way in revitalizing a business.

It is also important to ensure that the team within the organization buy into the new vision and are not only ready but also capable of steering the organization towards its next phase. This may involve training, promotions, realignments and in some cases bringing in new hands. Achieving buy-in from the team will require the leadership to effectively communicate the problem, involve them in formulating the solutions, work with the team in creating a clear vision of where the business is heading and empower the team that will do the actual work.

The next phase involves engaging external stakeholders. These include banks, suppliers, tax authorities and large customers. Often, business problems that require turnaround strategies have an impact on their finances. This makes it difficult for them to service debt, raise working capital and meet tax obligations. A good strategy must clearly outline how a business intends to meet its financial obligations to the various stakeholders.

This could include restructuring debt to allow for longer repayment periods while allowing the business to access capital to fund its order books, converting debts into equity, lowering production costs by improving efficiency and creative fundraising.

The writer is the Group Head of Strategy at TransCentury Group Plc.

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