Is this the end?
When your business is in trouble you often feel as though the end is inevitable. But even in the toughest of situations, there is often still options available. As outlined by Domenic Aversa in Corporate Undertaker:
‘Even if on the surface the business appears to be losing money on many fronts, there is always something that can be made profitable. It’s all about creativity and facts. Even in dead and dying industries, there is always one last supplier of that product or service … and they seemingly exist for a very long time. If there is money coming in through the front doors, then there is still a way to generate profit.’
But how can you assess your situation and move forward? Let us show you how.
Assessing the situation
The first step in analysing your company’s position is to look to the many acknowledged signs and symptoms that indicate a business is approaching insolvency. These can be categorised as either forward indicators (early signs of issues with the structure of the business that may lead it into insolvency) or lagging indicators (red flags that cannot be ignored and could mean that the business is already insolvent).
Forward indicators might include:
- Poor business model
- Excessive personal spending
- The maintenance of insufficient working capital
- Successive years of losses
- Poor bookkeeping
- Personal guarantees/ director loans/ not taking a salary
- Angry creditors
- Late debtor payments
- High staff turnover/ forced holidays
- Inability to obtain finance
- Growing broke
- Failure of a related entity
- Problems in the personal lives of directors
- No interest from purchasers
Lagging indicators might include:
- Statutory demands from creditors
- Court notices
- Missed BAS lodgement or payment
- Unpaid payroll or super
- Negative working capital and poor liquidity/ repayment plans and write-offs
- Issues with the ATO and auditors
- Continuing losses of both profits and customers
- A significant adverse event
As a struggling business owner, it’s important that you conduct a thorough analysis of your business in order to clarify which indicators are present and thus what needs to be done. Once you have a better understanding of where your company is at, it will be important to consider the advice of experts before deciding what to do next; there may be a way to save goodwill value through a restructure, although being decisive and willing to make tough calls is essential to ensure viability is lasting.
Options moving forward
Depending on where your company is at with reference to the above indicators, a number of options are available to you.
If your business is experiencing mainly forward indicators, you may be able to avoid getting to the point of insolvency. However, unless the fundamentals are in place, any action will likely not work and you will only be delaying the inevitable. Ultimately, directors have to take early action to get their business back on track. Every company in financial difficulty needs to:
- Get early strategic business advice – this can be difficult for SMEs since oftentimes there is few advisers who can assist, but it is important to obtain a specialist approach because this will likely achieve the best outcome.
- Get your bookkeeping in order – get a complete and thorough write-up to see what figures you are working with.
- Slash your expenses – cut all non-essential expenses.
- Terminate under-performing and non-performing employees – you cannot afford for your time and money to be sucked up by bad employees.
- Understand that whilst your business is on the brink of insolvency, you may need to make some bold moves – if you see high-value opportunities you need to take them as soon as possible.
It may also be the case that only part of your business is viable. This is a difficult situation since the current insolvency regime is not designed to help businesses save viable parts of their business and the ‘baby is thrown out with the bathwater’ in most instances. However, in certain situations a pre-insolvency adviser will be able to help you identify and isolate the performing part of your business and assist you with the process of detaching it from the non-performing part.
If your business is in a more dire situation and most of the indicators are lagging, you will immediately require the assistance of a pre-insolvency adviser to help you assess your options. An effective pre-insolvency adviser will advise a course of action based on the state of your business. There are three main options for businesses in such dire circumstances:
- Informal restructure (safe harbour)
- Formal restructure (voluntary administration)
- Business closure (liquidation)
Choosing your path
The difficultly as a business owner often lies in navigating the available options and choosing a path that works for you and your business.
People around you will have strong opinions on the matter. Some will argue that the business is condemned and that you should close it immediately. Others with tell you there’s nothing wrong and that your business should continue as usual. The truth is likely somewhere in the messy middle. Struggling businesses will have aspects that are productive and worth saving and others that need to be abandoned immediately.
As a company director/ business owner, the decision falls on your head. Undertake the necessary analysis. Get solid, trustworthy advice from experts. Accept that you can’t save everything and figure out how to solve the problem at hand. Do what needs to be done and do it quickly.