What you need to do if your business is in crisis

Is your business in a state of crisis? Is it keeping you up at night trying to work out where the next order is coming from, how you will pay staff and suppliers and what you can do to turn the situation around.

A failing business is an extremely stressful time for all concerned.  This is especially true when it is that business that puts food on the family table, or it is the success or failure of that business which will determine whether the family gets to keep or lose the family home.

Unfortunately research suggests fewer than 30% of companies in crisis  successfully turnaround and get back to good health.  unfortunately most businesses leave it too late to take action and make a difference to their situation.  When it comes to businesses in crisis time is of the essence and the quicker you seek professional help to take decisive action to turn the situation around the better your chances of success.

Unfortunately by the time you realise you are in trouble you have limited time to take action, this makes the situation very stressful.  When we are stressed we don’t perform at our best and make well thought out logical decision.  This is why it is imperative that you seek, professional, independent advice from a specialist.  They can quickly identify  and make informed decisions based upon proven strategies that could turn your business around or at the very least stabilise the crisis, or simply stop the bleeding to give you more time.

You then need to review key aspects of your business.

  1. Look at the management / leadership team

 

Take a hard look at the leadership team, after all it is under that team that the business came to find itself in crisis, and so I would suggest that it is fair to ask some hard questions of management. Many turnaround specialists advocate the immediate replacement of the leadership team, as in many instances they are the cause of the crisis. However, my experience is that this is not so straight forward in a privately owned and managed family business, which could be tantamount to asking parents to give their child away to a ‘better family’ – it’s never going to happen in 99% of cases.

 

 

You will have often heard about the importance of implementation in business, and it is never more important than in a crisis management and turnaround situation, as it is at this point that you need to work out exactly what has to be done, how to do it and who should be entrusted with doing it. This must take place within tight timeframes, towards exact desired outcomes, and there is no room for error. Furthermore, it is at this stage that the concept of stakeholder management and communication is amplified ten-fold, as key creditor-led stakeholders could spell the end of the company with the stroke of a pen.

 

In my previous articles I wrote on the symptoms and causes of decline and crisis, now is the time to go for the jugular. You

o fine- tune at the margins, procrastination and dilly-dallying will spell certain death, rather you will have to cut deep and administer enough medicine to ensure that you resolve all of the key issues quickly and sustainably.

 

ost likely will not have the time or the required resources to do so. The objective must be to quickly identify the life-threatening issues and to address them first in a decisive manner.

 

Synonymous with a business crisis is a rapidly worsening cash position and a lack of management control, go figure! What we quite often find is that management is paralysed in the face of what may seem like a hopeless situation, besides it is also our experience that management loses confidence at this stage and does not know which way to turn.

 

It is at this stage that the advisor or company doctor must step into the breach and take control of the situation. It has been my experience that some business owner-managers, even at this stage, cannot let go, and whilst they nod away like a wood-duck, another lovely Australian saying, they will not hand over the reins and take direction  these are lost causes, and best relegated   to history.

 

Your immediate objective must be to conserve cash, rebuild stakeholder confidence and reintroduce a semblance of predictability in to the business. This is a time for very strong top-down control, not a time for wishy-washy and uncertain leadership. Having said that however you as the business owner-manager will have to be consultative in your approach and pull key members of your leadership team into the decision making process to bring about stabilisation and ultimately change. So be strong, directive, but also consultative and collaborative in your leadership style.

 

Move quickly to impose a firm set of controls on the business, and immediately put in place a rolling three month cash flow forecast. This must be seen as one of your key tools to managing the business out of this crisis situation. Your stakeholders, most notably the bank, will want to know bi-monthly what your exact financial position is and what future cash flow is expected to be. Communication with key stakeholders through this stage is vital as happy and well-informed creditor-stakeholders will be inclined to give the company time to recover and may even be prepared to offer further assistance to the company. An unhappy creditor-stakeholder may pull-the-plug on the company to take control in an effort to preserve what little creditor value there may still be left in the company.

 

Your first challenge will be to generate enough cash to survive in the short-term. Usually this means generating enough cash to pay key creditors, usually the bank, primary suppliers and the ATO, and/or it could mean being able to cover employee wages that are falling due. In every case the need will be to keep these angry ants happy, and that will take cash. Failure to pay could result in formal insolvency proceedings.

 

cash, with surprisingly little impact to the operations of the business. It is surprising how effective it can be to just introduce well-structured cash flow forecasts and cash management measures into the business. This measure alone often results in an improvement in cash flow without having to take any further cash generation actions.

 

As a business owner-manager in crisis you need to immediately initiate three key tasks:

 

  1. Assess your
  2. Develop an action plan of cash-generation initiatives; and
  3. Establish and implement emergency cash-management

 

cash flow forecast will quickly point to the extent of the measures you will have to take to generate the required level of cash in

your business. We often use this as a reality check with our clients as it is critically important to draw the big bold lines in the sand, as at this point many business owner-managers are self-funding their business out of personal assets and lines of personal credit, and it is important to get a clear understanding of continued appetite to do so and at what pre-identified point the turnaround team will need to call an end to the effort, otherwise the failing company will drag the family assets down the drain with it.

 

The cash flow forecast must be done on a strictly cash receipts to cash payments basis, using a revised and carefully scrutinised balance sheet as the starting point,                                                                                                        sheet assets and capital structure. This is an intricate and complicated process, which given its importance as your starting point in this important process, should be carried out by a suitably qualified professional.

 

t is best to err on the conservative side when formulating these sale forecasts as your key creditor-stakeholders will not take well to any under-performance to initial forecasts.

 

It is now time to develop potential cash generating initiatives. You will need to determine whether you need to te as much cash as possible in the short term or if you have the latitude to keep some   initiatives

the

bank may be prepared to work with the business in providing short-                                                                        enacted, which they will of course only do if they trust management and see themselves as party to the solution.

 

A full list of potential cash generating initiatives needs to be compiled, and accompanied by the associated cash benefits and costs. Some cash generating initiatives will in fact cost the business to implement, this needs to be taken into account and each initiative very carefully considered.

 

Once in motion you will need to implement emergency cash management controls to ensure that the business is managed in accordance with the short-term cash flow forecasts, and that identified cash generating initiatives are successfully implemented. This will require strong cash management controls, that you dedicate a part of your time to managing the cash   in

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of your business will determine the level of control required and the resources available to support this process.

 

Where possible you should revoke or substantial curtail spending authority, introducing spending limits and levels of authority. Another good discipline is to initiate a regular meeting of all in the business involved in the cash management and control process. These meetings bring focus to the importance of cash management and builds accountability amongst the team members.

 

STRATEGIES THAT CAN GENERATE CASH IN THE SHORT-TERM.

 

There are six primary strategies that you can apply to generate cash in the short-term, namely:

 

  1. Reduce debtors;
  2. Extend creditors;
  3. Reduce stock levels;
  4. Put a stop to all planned expenditure;
  5. Sell assets; and
  6. Secure short-term financial

 

The management of overdue debtor accounts can make an immediate and sizable impact on cash flow. By reducing outstanding debtors you are essentially putting money in the bank and reducing funding costs. Tactically you may want to offer early payment incentives, explore the selling, or factoring, of your debtor book, renegotiating terms with your customers, prioritising production for your better paying clients and encouraging customers to pay a sizable deposit in advance. The simplest thing to do of course is to get on the phone and ask debtors for the payment of overdue balances.

 

You may seek to extend your payment terms with creditors. This should be approached with care and well communicated with affected creditors as you will want to maintain healthy relationships with these creditors, which are often suppliers to your business.

 

Generating cash through the reduction of stock levels can prove to be a significant opportunity for the business, with a particular focus on obsolete, slow-moving and excess stock. Where possible negotiate with suppliers to return excess stock to them for a cash refund or credit.

 

Where possible you should put a stop to planned expenditure. This will require that you conduct an urgent review of all planned expenditure and that you carefully assess what is essential and what can be stopped. As a rule all discretionary spending should be stopped with immediate effect, and management should have to re-motivate the required expenditure  against a strict set of criteria. At this point you may be able to reduce planned costs by negotiating a reduction in supplier costs and employee wages. It is important to bear in mind that if you plan to reduce employee costs through a redundancy program that this will come with the hidden costs associated with those redundancies which the business is obliged to pay.

 

If it becomes apparent that the cash generation activities discussed above are going to be insufficient you will then need to go in search of external financial support. The most obvious first port-of-call is the banks, however most often they too have reached the end of the line at this stage. You may want to think more broadly now and consider external equity shareholders or debt funders that you could approach for additional financial support. We encourage clients to be innovative in their thinking at this point as ordinary shareholders are normally very risk adverse and have a profit imperative, so will seldom want to invest in

 

a business that is on its knees. Those that will are most often very closely related to the business owner-manager, and as such have thrown all solid investment criteria out of the window. Furthermore, there are many strategic implications to take into consideration when introducing external equity shareholders, not least of all are voting rights and the question of dilution. For that reason we encourage clients to consider different types of instruments, which have different characteristics and different rights attached to them. These may include non-voting shares, redeemable shares and convertible notes, to name only a few out of a sea of possibilities. This is a very complex arena which comes with far reaching implications, and so we strongly recommend that you seek professional advice in this regard.

 

 

NEW MANAGEMENT AND FINANCIAL CONTROLS.

 

As parents what do we do when children are not playing nicely with their toys and fighting, yes we take their toys away. Business is no different, we take away the chequebook. The simplest way to take control is for you to sign all cheques and authorise all payments. If you are the problem you will need to rely heavily on your turnaround advisor for guidance in this regard.

By taking the chequebook away not only do you get to control expenditure but you also get the opportunity to closely scrutinise all expenses going through the Business, which can be an eye-opening experience.

 

On occasion we have recommended to clients that they remove their top management as it was blindingly obvious to us that they were the main problem. We would therefore encourage you to carefully consider your incumbent management team and to ask yourself honestly Is this person, or people, my problem and will they be successful in helping me deliver the  solution? You must be brutal and totally detached in how you answer this question. From experience I can share that most successful turnarounds owe their success to strong, determined and inspirational leadership, qualities the incumbent management team can seldom muster-up.  We prefer to reinstate the owner-managers, support them and coach them through  this process.

 

Put a freeze on all new staff hiring. We invariably espouse the need to reduce headcount as most companies are overstaffed, refocus roles and responsibilities and to engender a philosophy                                                                                    Good people will roll up their sleeves and make a difference, and the bad apples will fall from the tree. This is in fact exactly what you want, to move from a position of inefficiency and low productivity to optimal productivity with the resources that you

more resources to do the job. And of course for those staff that remain you will want to stop all planned salary  increases and promotions, decisions that can be revisited at a later date.

 

Put a ban on all capital expenditure and the entering into of new purchasing contracts or orders, as these activities place demands on the bus                                                                                                                                            turnaround effort.

 

THE FIRST ROUND OF COSTS REDUCTIONS

 

now taken the chequebook away, taken control of expenses, cleaned up management, put cash management controls in place and initiated a cash generation process. At this point you need to go through your P&L with a fine toothcomb in search of cost reduction opportunities.

 

This is a relatively easy exercise for the experienced business person or turnaround advisor, however our experience has proven that reality is often clouded by emotion and stress at this point. As previously mentioned many companies are over staffed, and this is often where the biggest expense savings are to be made. However, it is very often extremely difficult to get business owner-managers to agree to let go of staff who they have built up relationships with over many years in some cases.

 

Admittedly, there is a fine-line between removing excess staff and cutting too far. This requires extremely careful thought and consultation with the turnaround leadership team. As mentioned earlier you will need to think carefully about redundancy cost implications and devise a suitable strategy, this often requiring consultation and agreement with the affected staff members.

 

In certain businesses purchasing can be the single largest cost item. You should aim to reduce purchases where possible or negotiate better pricing and terms with your suppliers, not forgetting that the services full-time employees provide the business, the services of temporary staff and the services of sub-contractors are all in effect purchases that can be renegotiated and reduced.