Causes and Remedies of Business Distress
Conditions remain challenging for many businesses and this could well intensify over the year ahead.
Now more than ever it is critical for management to undertake a strategic review of their business to identify areas of underperformance and possibilities for profit and cash flow improvement.
On a daily basis, we are working with management teams who want to turn their businesses around.
I’d like to share some insights into the early warning signs that we see daily in underperforming or troubled companies, and positive actions management can take to remedy the problems.
It is critical for management not to leave it too late to ask for help – many businesses that end up in receivership could have been saved if they had heeded early warning signs and sought advice at the appropriate time.
There are common threads that emerge from businesses which get themselves into trouble.
These are what we describe as internal causes of underperformance.
In many cases management have been too focused on growing revenue without considering the impact on margins and profit.
Other times, businesses don’t have the right systems and controls in place to manage their working capital (businesses that are growing rapidly can quickly come unstuck if they don’t aggressively manage their debtors, stock and creditors).
Another common cause is when businesses don’t have the right depth of skill in their management team, don’t review financial and operational performance on a regular basis and have outgrown their finance facilities.
Early warning signs of business distress
There are also early warning signs, if business owners and business leaders can lift their heads up from the daily grind to notice. These are the major warning signs management teams (and their advisors), should be alert to:
- Working capital growing faster than revenue
- Difficulty in obtaining finance
- Management “buying” sales at the expense of margin
- Loss of a key customer(s)
- Increase in staff turnover
- Increasing creditor pressure
- Inability to pay tax and superannuation liabilities
- Impending banking covenant breaches
- General industry downturn or consolidation.
Remedies for business distress
And here are the main remedies to combat many of the key issues that businesses will be facing at present:
- Put in place a robust 13 week rolling cash flow so you can truly understand how cash flows through your business and when key flash points may be arising.
- Implement systems that accurately calculate the profitability of your products and/or services. For unprofitable products, raise prices or consider dropping them altogether.
- Identify slow moving or obsolete stock and be prepared to cull products that are simply not moving fast enough to warrant keeping them. Be ruthless, if the products are not moving then your customers don’t want them!
- Develop a strategy to deal with your major stakeholders (bank, key suppliers, key customers, shareholders and employees). Keep communicating!
- Develop a marketing strategy to win new customers so you can decrease any customer concentration risk you may have.
- Document a strategic business plan including detailed forecasts so you can demonstrate to your financiers that you are working to a plan. This will increase or maintain their confidence which is crucial at present when it is harder to raise new finance.
- Review your management team – do you have the right mix of staff with appropriate skills? If not, decide if the existing team can rise to the challenge with additional training and mentoring. If you are not confident don’t waste time hoping they will someday, consider recruiting experienced staff to plug the gaps.
- Conduct a review of your processes to identify any areas of labour or time wastage. Are you really getting your products and services to market as efficiently as possible?
- Consider engaging a specialist business turnaround firm like Vantage Performance to project manage many of these strategies so that management can stay focused on the core business.
Given that such remedies take time to implement, I can’t stress enough how critical it is to seek advice at the earliest sign of underperformance.
It really is the difference between life and the “death” of a business.
Michael Fingland, Executive Director of national business transformation and turnaround firm Vantage Performance, was awarded Australasian Turnaround Professional of the Year 2011 by the Turnaround Management Association, for his work with fast growth and troubled companies.