Recognising the need for a turnaround

Early warning signals of distress

"It is far easier to tread on an acorn than an oak tree".

Early warning signals of corporate decline and/or distress are well-documented.

Moreover, the probability of bankruptcy can be very accurately forecast long in advance e.g. using the Z-Score.

Yet, in practice, recognising the need for turnaround management invariably takes place too late and actions accomplish too little. 

Hence the need for emergency management once a turnaround situation assessment has been completed.

Basic early warning signals

Donald B. Bibault:

  • Mathematical forecasting methods e.g. the Altman Diagnostic (Z-Score).
  • Adverse trend signals - declining margins, declining market share, debt increasing rapidly, working capital declining, management turnover.
  • Adverse behavioural signals - poor communication, low morale, bad housekeeping, general air of financial stringency.

Detailed early warning signals

Stuart Slatter & David Lovett:

For an in-depth discussion of early warning signals, please refer to:

Corporate Turnaround: Managing Companies in Distress, Stuart Slatter & David Lovett (Penguin Books,1999) pages 14 - 19.

Characteristic decline curve

Characteristic decline curve  

Click on the thumbnail for an enlarged view of the turnaround management diagram.

Source: Fitzgerald Associates

This model has early warning signals for each of the three stages of corporate decline:

  • Hidden Phase: leading indicators
  • Subtle Phase: performance drivers
  • Overt Phase: financial symptoms of failure, lagging indicators, outcome measures

Triggering the turnaround

Financial stakeholders rather than management normally recognise the need and trigger action.

The reason is that management often goes through DABDA - denial, anger, bargaining, depression and then finally acceptance. 

Invariably, it is only during the last stage that turnaround practitioners are engaged, or when the business is liquidated or sold, unless forced to do so earlier by a a creditor or financial stakeholder.  

Failure to act timeously on symptoms of decline could stem from denial, complacency, or paralysis. 

For more information about adverse trend signals and the Z-Score, see financial symptoms of failure.

Moreover, financial stakeholders often having to work with late, inaccurate or even misleading information, and with the appetite inside and outside the business for good news.

Once triggered, the turnaround follows the natural turnaround stages.


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Turnarounds invariably start too late.  Reacting to early warning signals of distress help to recognise the need for a turnaround in time.