According to Dun and Bradstreet, Australia recorded a 12 per cent increase in business failures in the June 2011 quarter. Business conditions are not expected to improve in the short term and companies will need to continue navigating through difficult waters. We have selected 3 management tips that we feel will provide a significant impact for a business to survive these difficult times.
1. Understand why and where you are and where you want to go, and set targets to track your progress
A lot of businesses that fail have very poor accounting systems and records. Having up to date financial data is critical for a business in difficult times. Management needs to understand and rely on the most current position of their business, including understanding where and why any aspects of the business are underperforming, and be able to fix these areas and implement a plan for the future direction of the business.
Management accounting systems that provide current and reliable information on the following items are critical in order for a business to be able to adopt forward thinking solutions;
- Current cash position and cash flow requirements;
- Current liability position;
- Accounts receivables position;
- Sales figures;
- Gross and net profit results
One of the most important functions that turnaround practitioners undertake when successfully restructuring a business is immediately creating liquidity through the business internally by way of working capital management. This is achieved by actively budgeting, planning and tracking cash flow forecasting. A business in tough conditions should follow this practice.
Proper cash flow forecasting will enable the prediction of the peaks and lows of the company’s cash balance which will result in the assistance with planning of meeting the debts and expenses of the business moving forward. It will also create cash resources. Cash is the oxygen of a business. Without cash, a company cannot survive. As such, there must be realistic visibility and mechanisms put in place for adequate weekly and daily management of cash inflows and outflows through proper cash forecasting.
Once systems for accurate and up to date management reports are implemented, it is also important to set clear and realistic targets so that the progress of the business turnaround can be accurately monitored and constantly improved.
2. Look for long term rather than short term solutions
A lot of companies that are referred to us initially advise they do not require external help as they have better solutions. Unfortunately, many of these companies end up coming back to us after a few months with an even bigger problem.
The reason is that the majority of time the steps that are taken are merely a band-aid solution that does not deal with the cause of a problem and solve it.
There is no doubt that sometimes damage control is needed to stabilize a critical situation – however it is important that whilst a short term solution is found, management also immediately explores for solutions which are sustainable in the long term.
An example of a short term solution is a company entering into a payment arrangement with the Australian Taxation Office – this may be useful in the short term, however, if the business is continuing to make losses due to reasons such as delayed financial reports and poor budgeting, all the company is really doing is prolonging the inevitable to a later date. As such, entering into a payment arrangement is only part of the solution. Once a payment arrangement is secured, it is also important for a business to implement accurate and reliable accounting systems, look at ways at either reducing costs or increasing revenue, and properly forecast cash flow so that when the next tax bill arrives, it can be fully paid when it is due and payable without suffocating the businesses cash flow.
This same principle applies to companies that continually extend trading terms as part of their solution – this may assist in the short term, however suppliers may not be too happy continuing this arrangement, especially if the supplier has their own cash flow requirements.
3. Address the problems
It is amazing how many business executives bury their head in the sand when the going gets tough, causing problems to fester until it is too late. There could be many reasons for this however the most prevailing reasons we see in many instances is that business owners may feel that they have failed if they need to resolve to external assistance for a business which they have operated for many years.
The most successful restructures we have witnessed are those whereby Directors have identified the warning signs early, did not hide the fact that their business could be facing difficult challenges, and sought external assistance to address the issues early.
Directors and management should seek assistance of trusted and experienced professional advisers in this difficult area so that that they are provided with all the options available and equip themselves in order to execute the best strategy for their particular distressed situation.