How do directors become buoyant?
Gauging a sense of business confidence is a tricky task. Speaking to business owners in different industries can give a sense of the struggles, but it's tricky to pinpoint the cause particularly when it may be happening above and below the surface (i.e. externally versus internally). The fact is that with so many variables at play the tide can change on any one of them at any moment.
In the final survey for 2019, the Australian Institute of Company Directors (AICD) found that director sentiment—described as optimistic, neutral, or pessimistic—fell to a three-year low to -21.2 points since April 2019. That concludes that directors' outlook is anchored to the pessimistic territory.
The survey offers a snapshot of directors' views on Australian and global economies, business, regulation, governance and government policy. Among the findings1, it cites the top economic challenges; critiques government infrastructure spending levels; and identifies top areas for investment. Notably it found:
- Governance regulations was depicted as "significantly more negative" with 55% nominating "onerous".
- Legislation and director liability impacts 36% of directors' ability to make decisions.
- Australian boards have a "risk averse" culture with 70% in agreeance.
Director liability for company actions is largely captured under the Corporations Act 2001, which defines directors' duties and company operations in terms of proper financial accounts, decisions being made with 'due care and diligence', 'in good faith', 'no improper use' etc. In the crosswinds, is a host of separate legislation (taxation, consumer/employee protection, anti-competitive conduct etc.) that can create director liability. When exposure traverses to being personally liable over company debts, most can understand why a risk averse culture in business is prevalent. Given risk is foundational to being in business, directors inclined to be risk averse could consequently limit the potential of their business.
So, what keeps directors buoyant?
To keep the nautical theme, we'll use an analogy of director buoyancy being created from a mix of factors, including:
- a solid ship built on a strategic and considered company structure and internal controls
- a crew of trusted and professional advisors and internal stakeholders
- a navigation dashboard that monitors the business's position and predicts incumbent and future weather conditions
- a captain that changes course in view of the business and economic environment—proactively and reactively.
However, despite the most sophisticated software monitoring the business performance, responding to the simple indicators can be more meaningful in managing risk. Some warning signs include:
- Negative operating cash flows.
- Payments to suppliers/employees are higher than receipts from customers.
- Net operating cash flows are lower than profit after income tax.
- Lack of self-generation from existing customer/client base.
- Breakdowns in internal controls.
- Late or absent financial reports.
- High and increasing gearing (debt to equity). Deteriorating profitability or continuing trade losses.
- Delaying payments of creditors.
- Regularly requesting suppliers to extend terms of trade, cash on delivery suppliers or declining credit reference.
- Evidence of negligent or incompetent management.
- Lack of risk management.
- Financial warning signals for example, negative equity.
A raft of financial tools are available to directors to assess the level of risk in their business. For example:
- Liquidity ratios: current, asset (designed to assess if the company can meet short-term obligations)
- Operating ratios: days' receivables, days' inventory, days' payable, sales to assets.
- Financing ratios: debt to equity, interest-bearing debt to equity, interest cover.
To help directors best navigate when the indicators above suggest the waters are getting murky, they should call upon their trusted crew of trusted and professional advisors to get advice. If calling upon the advice of an insolvency and restructuring practitioner, they can guide directors through options that range from basic restructuring and internal controls advice, to using the safe harbour provisions. The safe harbour laws' intention at a broad economic level are to provide an environment that encourages entrepreneurialism and innovation. More specifically, the laws seek to provide directors an opportunity to explore restructuring opportunities where previously, stringent insolvent trading laws may have made directors hesitant—due to the risk posed.
Building awareness of and knowledge on the raft of tools and options available can work to boost director confidence and become more resilient to risk. Perhaps the more responsive, and dare we say 'fluid', the less that directors will be risk averse. Which can only serve us all as risk is central to our market economy.
At Worrells, with 29 partners across our 33 locations, we deal with individuals and businesses dealing with financial stress. Your local Worrells partner is here to help. Contact us for a complimentary and confidential discussion.
1 AICD: Director Sentiment Index 2019: https://aicd.companydirectors.com.au/advocacy/research/director-sentiment-index-second-half-2019
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.