How to manage your company's financial turnaround in the digital age.
The rise of economic headwinds in 2022 may signal turnaround activity in 2023. Rising interest rates, escalating inflation, and austere government support caused sluggish market activity and consumer demand in 2022. These disruptions have already affected companies with complex supply chains and rigid customer pricing arrangements. As companies focus on belt-tightening and efficiency, they face higher-cost borrowing conditions, reduced market liquidity, and increased bankruptcies and operational restructuring activity.
Even well-managed companies can encounter a period of financial stress. Financial pain can occur for several reasons, some of which are beyond a company's control, like:
- Loan with an adjustable interest rate
- Failures by management
- Bad decisions related to marketing or pricing
- Poor budgeting
- Inability to collect accounts receivables on time, and
- Poor accounting practices
What is a turnaround?
A turnaround occurs when a business takes successful actions to correct a period of declining financial performance, which threatens its solvency. Organizations facing a turnaround are typically:
- Stressed to the point of underperformance or distress, and
- Experience a decline where a lack of action will lead to business failure
Turnarounds are similar to a restructuring, where an organization experiences a profit loss and can't meet shareholder expectations. The first step in a turnaround is crucial: the immediate assessment of underlying issues and the business's revitalization. The sooner a company engages in a turnaround process, the greater the chances of success and improved outcomes.
During a turnaround, your financial statements are analyzed to identify areas of concern. Typical areas of improvement are: cutting overhead costs, streamlining operations, and negotiating with suppliers, lenders, and shareholders to restructure your company. Restructuring drives the company from poor financial performance to breakeven and eventually profitability.
Remedies to mitigate financial distress in the digital age include:
Companies use analytics in a turnaround to help improve performance in several critical areas. Below are four significant ways data analytics can help your business.
The most obvious benefit of data analytics is using data to inform and justify critical business decisions.
Many businesses use data analytics to streamline operations. For example, by collecting and analyzing data relating to supply chains, your business relies on identifying where delays and bottlenecks happen. It can also help to predict where future problems might occur and how to mitigate them best.
Just as analytics can identify and predict inefficiencies, it can highlight potential risks and implement preventative controls. Financial risks can also be identified and prevented to mitigate risk and loss events.
All businesses face data security threats. But, data analytics can effectively improve your organization's cybersecurity and prevent threats from causing financial or reputational harm. Analytics can highlight and flag abnormal behaviors, allowing you to stop a threat before it becomes a security incident.
Process and access governance
The modern business environment is dynamic and requires the automation of process governance and access governance to ensure continuous compliance with cybersecurity, data, and segregation of duties policies. The automation of process governance and access governance can help companies in a turnaround effectively respond to complex business challenges and balance six critical objectives:
Reduce operational costs
Process and access governance automates labor-intensive processes like access certifications, access requests, and provisioning, substantially reducing operating expenses. Automating processes can significantly reduce the time IT staff allocates to administrative tasks and delegates users to request and review access independently.
Reduce risk and strengthen security
Compromised identities are a growing threat in every industry. Having centralized visibility of user access creates a single source of truth when determining "who has access to what," allowing management to quickly identify excessive access, policy violations, or weak controls that put the business at risk. Access governance solutions enable companies to identify risky user populations, policy violations, and inappropriate access privileges and to remediate these risk factors.
Improve compliance and audit performance
Process and access governance allows companies to verify that the proper controls are implemented to meet the security and privacy requirements of regulations like SOX and GDPR. They provide consistent, repeatable processes for reviewing, requesting, and approving user access, all underpinned by policy-based access. With policy-based access control, companies can dramatically reduce the cost of compliance and risk management and enforce consistent, auditable, and easy-to-manage user access.
Efficient user access
By giving your users rapid access to the resources they need to do their jobs, access governance enables them to become productive more quickly and stay productive, no matter how much or how fast their roles and responsibilities change. It also allows users to request access reducing the workload on the help desk and IT operations. And with automated policy enforcement and access governance, you can meet service-level requirements without compromising security or compliance.
Automated workforce restructuring
Automating critical processes enables organizations to restructure their workforce after a layoff by enabling the easy provisioning and de-provisioning of user access to resources. This is critical after a layoff because it allocates the access that employees taking on additional responsibilities need and terminates access to departed employees, mitigating the risk of an insider threat. When you restructure the organization, there are fewer people doing more things, so the organization needs to be able to provide better workflow management to ensure productivity is not slowed down by users waiting for access.
Restructuring your process for more efficiency allows you to reduce process completion time. This is especially beneficial in the Procure-to-Pay (P2P) process. Faster processing means faster three-way matching and auto-paying of suppliers. An automated P2P process can also reduce the risk of leakage, duplicate payments, and late fees that incur expenses.
Transitioning from reactive risk management to proactive risk management with automated controls
Reactive risk management refers to a situation where you don't have a plan for threats - you react to them as they happen. As a result, you're always a step behind and don't have time to mitigate threats.
Proactive risk management, on the other hand, is a plan to avoid or manage threats. And during a turnaround, having a plan and executing that plan is vital. Therefore, businesses must proactively assess their risk and vulnerability from an operational and financial standpoint and act decisively to mitigate issues.
Internal controls are implemented to monitor information, processes, or regulatory compliance and mitigate risk. In other words, controls are safeguards or countermeasures to manage risk and ensure the company operates in a secure environment. Internal controls also help companies to comply with laws and regulations and prevent fraud. They also can help improve operational efficiency by ensuring that budgets are followed, policies are enforced, capital shortages are identified, and accurate reports are generated for stakeholders and management.
Companies experiencing distress must find ways to operate sustainably by focusing on analytics, process and access governance, and proactive risk management. SafePaaS can provide you with the necessary tools and guidance for successfully managing business risk to improve your business's financial viability.
Governance in the Digital Age
Effective corporate governance is the core of long-term, sustainable company growth. However, corporate governance requirements are becoming increasingly burdensome, with regulators worldwide placing greater emphasis on the impact businesses have on their employees, customers, and suppliers as opposed to focusing solely on shareholders.
Top Risks for Private Equity
Whether the company is a family business, backed by venture capital, or funded by private equity investors, internal controls are essential as you evolve. Internal controls can be integral to processes that can help mitigate risks and add bottom-line value.
The importance of controls for pre-IPO, start ups and investors
Start-ups and pre-IPOs need money to operate and grow their business. Investors are expected to spend considerable time (and many do) evaluating the business before deciding whether to invest. Despite this, a significant percentage of startups dissolve within 10 years. The number of companies considering getting listed and backing out is also relatively high. Heightened governance and regulation is one reason why companies choose not to get listed. This also, in effect, exposes the investor’s money to risks.