Mark Newman, Head of Recovery Solutions answers the questions businesses find themselves asking during difficult times.
Q: What are the key signs of a company being in distress?
The most visible sign is cash; late payments to suppliers, offers of discount for early payment from customers, unusual asset disposals, requests for additional funding from expensive lenders.
Additionally, underlying causes can also be evident; taking contracts at low margins, paying high prices for supplies as lines of existing credit are exhausted, high turnover of staff, the impression that no one cares about the business, both internally and externally.
Q: When is the right time to restructure and how often can that work?
For a successful restructuring, to save a business, or part, this needs to start while management still has energy for the inevitable turmoil this will cause. Trying to restructure following an overly extended period of fighting fires when cash, and energy, reserves have dwindled will often turn from an uphill struggle to more like climbing a mountain.
A realistic approach that significant things have to change, otherwise a restructuring wouldn’t be needed, is key to success. That may mean saving only part of a business, and being realistic about the abilities of management and staff to work in the reshaped business.
Given energy reserves at the outset, and an objective approach, restructuring will more often than not succeed.
Q: Is there a time when it is just too late to do anything?
Inevitably yes. In any free economy, markets are constantly changing, and some businesses will fail to see the warning signs until, literally, too late. Recent high street retail failures demonstrate that thriving businesses a few years ago can rapidly be overtaken by new entrants or different routes to market. If management does not continually invest in the future of their businesses, a last ditch restructuring is likely to be too little too late. However, specialist advisors can sometimes provide help in avoiding these issues,
Q: How can you spot the signs a turnaround may be necessary before cash becomes critical?
Objectively looking at a business and asking how the recurring business is generated. Does it rely on a market advantage, which will almost inevitably be eroded over time? If so, is the business investing to maintain that advantage? Are margins being eroded to keep customers returning? This may work over the short term, but is unsustainable. Are management clear on their vision for the business over the next three, five and maybe ten years, and planning accordingly? If there is any uncertainty, then shareholders and the executive team should seek specialist advice to spot and deal with these early warning signs.