Accounting discipline offers us a roadmap for turnaround. I mean accounting provisions offers us a checklist about company risks. When we are talking about turnaround one of the first things to do is checking the status of the provisions and be sure that all the risks are really contemplated, provisioned and updated.
In order to turnaround a company first it is to recognize the problems and make the provisions needed to create a realistic baseline. Then we will be able to design a company recovery path. Sometimes this important turnaround stage is not well performed and the result is a false turnaround starting phase because of every few weeks any unexpected risk is discovered and appeared.
Now we are going to review some of the main provisions to be reviewed in turnaround:
- Provisions for long-term employee benefits: For instance holidays not enjoyed previous years that must be paid in case that the relationship with those employees finished. Moreover in turnaround is quite common to change some people to get out of the crisis, I mean to “get out of the bus” staff that sabotages the turnaround process, or they are not able to adapt to the new management needs, or they do not have really interested to continue in the company, or they do not have the skills or productivity needed.
- Provisions for taxes: Because the company is in financial troubles, it is not going to paid taxes for profits. However, we could have other taxes like VAT that could be delayed the payment. So those taxes delayed must be provisioned.
- Provisions for other liabilities: One of the core turnaround disciplines is legal issues. It is quite common having legal issues opened for firing people, stopping or renegotiate suppliers’ contracts, customers’ complaints for delays, and so on.
- Provisions for dismantlement, removal or restoration of fixed assets: I have personally seen a situation in which the factory floor status prevents that forklift can do their job properly, or roof that allows raining goes inside the warehouse.
- Provisions for environmental actions: Firms in financial troubles use to neglect environmental issues.
- Provisions for impairment of inventories (merchandise, raw materials, work in progress, finished goods, waste and revered materials): It is usually to find in turnaround companies’ problems with the stock. So problems with: expired stock; obsolete stock; wrong purchases that was never returned and with very limited chance to sell someday; revered materials bad stocked that affect to material quality.
- Provisions for impairment of trade receivables: Sales process is not finished until we receive the customer payment. However sometimes sales and financial departments do not coordinate properly in monthly basis to optimize trade receivables. So you can find situations with trade receivables that were created several years ago and the documentation that supports the sale has been lost…
- Provisions for onerous contracts: The costs associated to accomplish a contract that exceeds the economic benefits of the contract. I mean problems with sales pricing or/and executing the contract.
- Provisions for other trade operations: Costs related to sales returns, product/service guarantees, or revisions. Those costs represent an important risk and you can find companies that do not provision them.