When a company that has experienced a period of poor performance moves into a period of a financial recovery, it’s called a turnaround. A turnaround may also refer to the recovery of a nation or region’s economy after a period of recession or stagnation. Similarly, it can refer to the recovery of an individual whose personal financial situation improves after some time.
Key Takeaways
- A turnaround is the financial recovery of a poorly performing company, economy, or individual.
- Turnarounds are important as they mark a period of improvement while bringing stability to an entity’s future.
- To create a turnaround, an entity must acknowledge problems, consider changes, and develop and implement a problem-solving strategy.
Igniting a Turnaround: Steps to Financial Recovery
Turnarounds signify an upward shift or improvement for an entity after it experiences a significant period of negativity. The turnaround is akin to a restructuring process where the entity converts the period of loss into one of profitability and success while stabilizing its future. In investing, the term can mean the amount of elapsed time between the placing and fulfilling of an order.
Turnarounds may happen on many levels from the individual to a country’s economy or even be a global event. The term indicates a phase when an entity begins to experience steady and positive financial or performance recovery after a time of decline.
In most cases, the first step in moving into a turnaround phase is to acknowledge the problems creating a downturn. For businesses, this may involve examining changes in management or problem identification and solving strategies. In dire situations, the best action may be to liquidate the company.
Key Indicators of a Turnaround-Ready Entity
There are specific features that usually identify an entity in need of a turnaround. For a business, these may include declines in the price of its stock, the need to layoff employees, and revenues that do not cover requirements to pay creditors.
Changes in a firm’s competitive advantage and outdated products or services may also indicate a business that needs to investigate turnaround strategies. Additionally, poor management of resources such as labor and capital can put undue pressure on the company.
A stock speculator may profit from a turnaround if they accurately anticipate the improvement of a poorly performing company.
Catalysts for a Successful Turnaround
Turnarounds rarely happen in isolation but are the result of internal and external forces. Internally, more attention may be paid to the problems in processes, spending, management, and other factors that created the period of decline.
Externally, new regulations or market opportunities might emerge that reduce costs or increase revenue potentials, aiding in the recovery effort. A turnaround management team will review the primary causes of failure and devise a strategic plan that may include restructuring or repositioning the business.
Real-World Example of a Turnaround: General Motors
The U.S. economy experienced a recession in 2009 following the subprime mortgage crisis, which led to the collapse of the U.S. housing bubble and the fall of major banks globally. The economy began experiencing a turnaround about a year later, aided by federal government bailouts and stimulus packages.
Declining sales preceding the financial crisis, combined with a tightened lending environment for auto sales, significantly slowed revenue and earnings for U.S. automakers. In 2009, General Motors (GM) declared bankruptcy as a result of the crisis, leading to its stock being delisted from trading. Bailout funds and its bankruptcy helped restore the company’s production and sales capabilities.
In 2010, after a complete reorganization, GM’s stock was relisted for trading, with renewed production and sales driving the company forward.
Related Terms: recession, stagnation, strategic planning, liquidation, creditors.
References
- General Motors. “GM Agreement with U.S. Treasury and Canadian Governments Providing Fast Track to Competitive Future for ‘New GM’”.
- General Motors. “GM to Launch Largest U.S. Initial Public Offering of 2010 at the NYSE”.
