An objective review of a business will be useful to identify the areas which may need help and to formulate strategies for dealing with the difficulties that the economic downturn will present. Using a "fresh eye" approach could identify any early warning signals.
As all businesses are unique, early warning signals will vary from business to business. Issues or symptoms affecting businesses on a large scale can be categorised into six main categories:
- Industry factors: lifecycle of the industry (emerging, mature or declining), competitive forces, new entrants, obsolescence from substitutes, domino effect (eg property managed investment schemes are currently going through rationalization) and tax consequences
- Economic factors: growth or decline, exchange rates (exporters) or interest rates, reliance on political policies (ie tariff protection), susceptibility to change and discretionary dollar spending (eg the retail sector is currently being influenced by this).
- Business Hazards: Insurance requirements, industry bad debts, environmental and weather impacts (ie drought), influence of unions / strike action
- Technology: the need to evolve with technology updates, inadequate computer systems, product obsolescence, and the need for R&D expenditure
- Competition: cheaper imports, new entrants etc
- Legal, political and social issues: social trends, economic policies and environmental laws
From an internal perspective issues or symptoms that affect a business include:
- Directors / owners issues: experience, involvement in business, lifestyle and succession planning.
- Management or staffing issues: the loss of key management, staff turnover, quality of management skills and labor shortage issues
- Financial control: Loss of control
- Financing: Highly geared, inappropriate debt structure, the use of expensive high risk lenders (ie past start up phase)
- Business fundamentals and trading issues: Level of stock / inventory holdings, increase in the aging of debtors and creditors, holding on to payments, dependence on a small number of customers or suppliers, increases in warranty claims, irregular payment of taxation obligations and overtrading (increasing turnover at the expense of profits).
- Other symptoms include: deferring the payment of statutory creditors, non payment of insurance premiums, realisation of assets to fund operations and the use of unofficial finance (deferring the payment of wages, and superannuation etc), loss of key personnel, the general condition of premises, level of obsolete stock and a sharp decrease in expenditure on the maintenance of plant and equipment can all be symptoms of a business that may need help.
Whilst no two businesses are the same, some strategies used to assist with short to medium term cashflow issues include:
- Reviewing inventory levels, consider running down stock levels;
- If there is a pattern of falling profits, undertaking a profit bridge exercise to examine underlying causes;
- Reviewing fixed asset requirements and considering the rationalization of any excess capacity;
- Debt restructure;
- Sale of business units to reduce gearing levels;
- Scaling back operations to the core business;
- Management buyouts;
- Sale and lease back of assets to assist with a one off cash injection;
- Decreasing the time taking to collect on debtors and tighting up credit policies;
- Outsourcing the collection of debtors; and
- Negotiating with key suppliers (useful in a competitive industry) to extend credit terms (eg from 30 to 45 days).
It is important to understand the risks of insolvency when a
business is under financial stress. Put simply, insolvency is
when a company is unable to pay its debts as and when they fall
due and payable. The Corporations Act imposes personal
liability on directors that operate insolvent companies.
Trading whilst insolvent is also a criminal offence and in some
cases jail terms are imposed.
Accordingly, it is important to understand that when
businesses are faced with insolvency, experts should be called
in.
As an economic downturn appears to be upon us, it marks a good
opportunity to use this change in economic conditions as an
excuse to undertake a review of strategic and operational
drivers in the hope of preventing any symptoms in the
future.
- inadequate computer systems, product obsolescence, and the need for R&D expenditure
- Competition: cheaper imports, new entrants etc
- Legal, political and social issues: social trends, economic policies and environmental laws
From an internal perspective issues or symptoms that affect a business include:
- Directors / owners issues: experience, involvement in business, lifestyle and succession planning.
- Management or staffing issues: the loss of key management, staff turnover, quality of management skills and labor shortage issues
- Financial control: Loss of control
- Financing: Highly geared, inappropriate debt structure, the use of expensive high risk lenders (ie past start up phase)
- Business fundamentals and trading issues: Level of stock / inventory holdings, increase in the aging of debtors and creditors, holding on to payments, dependence on a small number of customers or suppliers, increases in warranty claims, irregular payment of taxation obligations and overtrading (increasing turnover at the expense of profits).
- Other symptoms include: deferring the payment of statutory creditors, non payment of insurance premiums, realisation of assets to fund operations and the use of unofficial finance (deferring the payment of wages, and superannuation etc), loss of key personnel, the general condition of premises, level of obsolete stock and a sharp decrease in expenditure on the maintenance of plant and equipment can all be symptoms of a business that may need help.
Whilst no two businesses are the same, some strategies used to assist with short to medium term cashflow issues include:
- Reviewing inventory levels, consider running down stock levels;
- If there is a pattern of falling profits, undertaking a profit bridge exercise to examine underlying causes;
- Reviewing fixed asset requirements and considering the rationalization of any excess capacity;
- Debt restructure;
- Sale of business units to reduce gearing levels;
- Scaling back operations to the core business;
- Management buyouts;
- Sale and lease back of assets to assist with a one off cash injection;
- Decreasing the time taking to collect on debtors and tighting up credit policies;
- Outsourcing the collection of debtors; and
- Negotiating with key suppliers (useful in a competitive industry) to extend credit terms (eg from 30 to 45 days).
It is important to understand the risks of insolvency when a
business is under financial stress. Put simply, insolvency is
when a company is unable to pay its debts as and when they fall
due and payable. The Corporations Act imposes personal
liability on directors that operate insolvent companies.
Trading whilst insolvent is also a criminal offence and in some
cases jail terms are imposed.
Accordingly, it is important to understand that when
businesses are faced with insolvency, experts should be called
in.
As an economic downturn appears to be upon us, it marks a good
opportunity to use this change in economic conditions as an
excuse to undertake a review of strategic and operational
drivers in the hope of preventing any symptoms in the
future.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
