What Is a Turnaround?
A turnaround is the financial recovery of a company that has been performing poorly for an extended period of time. 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.
Turnarounds are important because they mark 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.
How to Effect a Turnaround
A turnaround refers to steady, positive movement experienced after a significant period of performance decline. Turnarounds can be experienced in a particular business, a larger-scale economy, a particular market, or an individual’s financial situation.
To effect a turnaround, a company must acknowledge and identify its problems, consider changes in management, and develop and implement a problem-solving strategy. In some cases, the best strategy may be to cut losses by liquidating the company rather than trying to turn it around.
- 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 effect a turnaround, an entity must acknowledge problems, consider changes, and develop and implement a problem-solving strategy.
Identifying Who Needs a Turnaround
Possible characteristics of a troubled company in need of a turnaround include revenues that do not cover costs, the inability to pay creditors, layoffs, salary cuts for officers, and a significant decline in stock price. Poor management and/or social, technological, and competitive changes may have caused the products or services the company sells to be perceived as subpar by consumers. A speculator may profit from a turnaround if he accurately anticipates the improvement of a poorly performing company.
Catalysts for a Turnaround
Turnarounds are rarely spontaneous. Instead, they are often the result of increased efforts or changes in current practices. Internally, this can include updates to manufacturing processes, changes in management strategies, or significant reductions in certain spending categories.
Turnarounds may also be spurred by external forces such as a business improving due to changes in regulations resulting in higher profits, or the lowering of raw material costs that unexpectedly rose such as with fuel prices.
On an individual level, a person who experiences a long period of unemployment accompanied by financial hardships may experience a turnaround after securing new employment with a reliable source of income.
A business may determine a turnaround has occurred after changes in the business model bring in profit instead of previously experienced losses. This often relates to significant increases in sales or notable reductions in spending.
Economies suffering a recessionary period experience a turnaround when they begin to record a new period of economic growth and financial gain. Specific industries, such as the automotive industry, can also be the subject of a turnaround if a downward trend is followed by a reversal of that trend.
The U.S. economy experienced a recession in 2009 after the subprime mortgage crisis led to the collapse of the U.S. housing bubble. The crisis led to the collapse of some of the country's—and the world's—biggest banks. The economy began experiencing a turnaround about a year later, after the federal government responded with a series of bailouts and a stimulus package.
Declining sales leading up to the financial crisis followed by a tightened lending environment for auto sales were two factors that significantly slowed revenue and earnings for U.S. automakers. In the late 2000s, the auto industry suffered troubled times. In 2009, General Motors declared bankruptcy as a result of the crisis and its stock was delisted from trading. Bailout funds and its bankruptcy helped the company restore its manufacturing production and sales. In 2010, after a complete reorganization, GM’s stock began trading again with increased production and sales.