07 August 2009

BRW Magazine

1. Every business is different; every economic downturn has its own characteristics. But are there common warnings for a business that might be facing insolvency, or at least the threat of financial crisis?

The following is a list of the typical warning signs for a business that may be facing cash flow issues or insolvency:

- Declining margins; increasing creditor pressure; profit warnings; overdue ATO and superannuation; increase in staff turnover; resignation of key management staff; banking covenant breaches; difficulty in obtaining new finance; creditors putting the company on stop supply or cash only purchases.

2. In the very early stages, are there any tried and proven methods for trying to reverse the progression towards insolvency before it actually occurs?

The following is a list of some initial strategies that can be put in place to stabilize the business

- Implement a rolling 13 week cash flow so you can understand if there are any key flashpoints on the horizon

- Implement a working capital reduction program

- Review the margins of the major products and services and if the margins are not sufficient on certain items be prepared to put the prices up at the risk of losing volume

- Look for wastage in the business (ie. inefficiencies in the production system) and ways to improve productivity

- Implement an employee culture program as this will deliver significant productivity and customer service benefits

- Implementing a debtor finance facility can be used to release the cash tied up in the debtor book which can be used to reduce bank debt or trade creditors

3. What are the key elements required to turn a business around? (sound management, good product)?

The following are the six key areas required in order to achieve a successful turnaround:

a. Proving business viability

a. Management and their advisors need to be able to demonstrate a business plan supported by detailed financial forecasts which clearly demonstrate the major changes they will implement in order to maintain or restore viability. The key focus needs to be on the assumptions going forward and how each initiative will impact on sales, margins, net profit, cash flow and the finance facilities. Typically this is where a number of businesses get it wrong as they don’t know or understand how to “package” the information in a way to provide clarity to the many stakeholders.

b. Maintaining business reputation

a. Management must have a strategy for maintaining the goodwill inherent in the business. A strategic review will determine whether it is customer sales, product or service quality which is the main issue of concern and that will help guide the management team on what strategies to implement to ensure the businesses good name is kept intact.

c. Credible management

a. Typically, to restore the confidence in the major stakeholders some changes will need to be made in the senior management team. Either to replace certain key roles due to underperformance or to bolster the team to provide additional experience in managing the business through a turnaround as most management teams will not have the experience in leading the business through such a process.

d. Ability to maintain supplier terms

a. It is critical to ensure ongoing supply and to minimize supply disruptions as any decrease in production etc will have an immediate impact on sales and then future cash flow. Management will need to negotiate with their key suppliers to ensure they have confidence in the turnaround plan and are comfortable with the new terms being offered by management to ease pressure on the business. If more favourable terms are agreed to with the major creditors (which will provide cash flow support) management must demonstrate when these “special” terms will be able to be dissolved and revert back to normal commercial terms.

e. Ability to source external funds

a. A key component of any turnaround is securing both internal and external sources of working capital to fund the business through the major period of change. Internal sources relates to the “lazy” working capital tied up in the business that can be released for cash flow. This relates to the amount of cash tied up in debtors, stock and creditors. There are a range of initiatives which can be implemented to release cash from these areas which can be used for paying overdue creditors, paying down debt or capex etc.

f. Understanding the agenda of the key stakeholders

a. It is important to understand the agenda of all key stakeholders and to understand who exactly they are. They comprise the financiers, shareholders, employees, creditors, unions, and government. Each stakeholder group has their own agenda and it is important when formulating and selling the strategy that you have catered for each class.

4. After a successful turnaround, what will be different in the business? Importantly, what should be different?

- A renewed focus on profit and cash flow, not sales volume.
- A big focus on improved communication across all levels of the business.
- A better informed and engaged group of stakeholders
- Improve employee morale and culture
- Reduced debt levels
- Essentially, much less stress on the business

5. When is it the right time to pull the plug? When is it the right time to pursue rescue?

- The time to realize that the turnaround may not succeed is when you form the view that the six key areas identified in point 3 are no longer achievable. If this is the case then it may be possible to continue the restructure via a Voluntary Administration process.

Our Vantage Performance team is looking forward to interacting with you again.


Michael Fingland
Managing Director

Vantage Performance Team
Profit Improvement & Turnaround Specialists

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