John Fairbrother, business rescue specialist at Begbies Traynor in Liverpool, offers his comments on recognising when a business is in trouble, and suggests some of the steps that may help to turn it around.

The end of the financial year is always an ideal time for businesses to take stock of their performance, assess their finances, and make plans for the following year.

For some struggling companies, this is also the time where the depth of their troubles becomes apparent, and they realise that swift action and help is needed to turn their business around.

Recognising the problem before it’s too late is the first and most crucial stage of a company’s recovery and immediate action could help it to survive and prosper rather than fail. This is especially important for small and medium sized firms, or companies that are active in their local business community, as the failure of one company can cause a domino effect, causing businesses reliant on the trade of the failed company to also run into difficulties.

Assessing the problem and seeking advice

Assessing the issues and having a clear view of the company’s problems is vital to saving a company from collapse. Having a realistic view of a business’ finances and growth prospects will inform any future plans, so being honest is crucial.

Seeking external advice is also an essential part of evaluating the extent of the issues. In some cases – particularly for SME’s – company directors try to solve the problems themselves, but end up spending a large amount of time firefighting, which can have a further detrimental effect on the business focus. Bringing on board an expert advisor who has experience handling these situations is a huge benefit, as they will be able to provide an independent opinion that is free from sentiment and untainted by company politics.

Creating a plan

The key component of a successful plan is to be realistic and act quickly. Having obtained a full picture of a business’ financial situation and problems, the management team with a recovery practitioner will have to focus on the short-term future of the business, making plans to address cash flow needs and profit margins. It is also important that management and advisors start to look at the long term future of the firm, examining ways that they can return to profit and, eventually, start to look at growth opportunities.

Implementing a business turnaround plan can be challenging, but an experienced and qualified restructuring expert can help guide the leadership team through the difficult decisions that have to be made, as well as offering a reassuring sounding board to work alongside.

An effective management team

Over the past few years the economy has gone through many changes. In our experience, however, managerial practices and attitudes haven’t kept pace with changes in the economic environment. The result is that some business leaders don’t accept their mistakes or the changes to their circumstances, and attempt to carry on regardless.

Many firms that operate in business communities like Liverpool’s are owner-managed or family run. This means that the management teams often have a highly personal connection with their staff and employees – this, can sometimes cloud judgments when making key decisions about streamlining or restructuring the company.

Providing there is someone guiding the management’s decisions, this personal connection with the workforce can be a positive, as keeping staff informed and aware of the situation can maintain or boost motivation, ensuring everyone pulls together and works towards a turnaround of the businesses fortunes.

Finding funding

When a business is in trouble, directors often believe that they will not gain a finance package from banks or funding providers, as they do not have a proven record of success. External advisors can act as intermediaries between banks and customers in order to provide a recovery package that is specifically tailored to suit the company’s needs.

There is also a range of asset or invoice financing products, designed specifically to help firms manage their cash flow, meaning that money contained in machinery or unpaid invoices can be reinvested into the company to help boost growth.

A recovery advisor can advise on these and help to create a clear and structured business plan, demonstrating a company’s short term and long term prospects, as well as showing the funding provider a solid plan which demonstrates how they will get their money back.

Communication

Throughout all of these stages, communication is the key to securing a business’ future success. Hiding important factors or clouding the truth can have a detrimental effect on the company’s recovery, slowing down the speed that management can implement important changes.

It is also vital that firms speak honestly to their financial advisers and funding partners to keep them up-to-date with their financial situation, as this gives them time to secure any stop-gap lending or facilities that may be necessary.

Honesty really is the best policy for company directors that think their business may be heading for financial difficulty.

Acknowledging mistakes and seeking external advice at the earliest stage possible will increase the options available to the business – helping it to take the first steps back on the road to recovery.

John joins a panel of speakers at this month’s MYOB Monthly event on Wednesday, 25th March. For more information, click here.