Tag Archives: business distress

Business Restructuring! Do You Know When it is Time?

When do you know it is time for a business restructuring? Wait too long..it may be too late!

Restructuring TimeA restructuring, is it time? Tick, tick, tick, the clock is ticking. In less than a week payroll is due. The company does not have enough cash to pay the 200 employees and you are not even thinking about how to pay the suppliers. The credit line is fully drawn and you have no more collateral to give. What do you do? How much time does the company have? These are the type of issues the company is facing. Is it time for a business restructuring?

If you cannot meet payroll, staff will leave, the state will be notified that the employees have not been paid, and this will be only the beginning of the company’s problems.  You know that if the company does not meet payroll, the game, known as the business, is over. And this is the only the start of the problem. For a privately owned business, personally guaranteed company obligations will default, and the personal assets of the owners will be seized.

This is not so much of an extreme case. This scenario often happens. So thinking about the company from the perspective of how to avoid or change the situation is critical.  A business restructuring may be needed and now!

Business difficulties can happen quickly and for many reasons. Businesses may suffer from lost market expectations, reduced operating earnings, or severe cash flow troubles. Whether triggered by marketplace forces or internal dynamics, an early assessment and quick decisive moves will be needed to reinvigorate earnings and company value (PriceWaterhouseCoopers LLP, 2012). This is when you know that a business restructuring must commence.

Stakeholders Want Answers

Collectively, employees, vendors, bankers, and other creditors (the stakeholders), will be assessing answers from the rubble of the company to questions ranging (DiNapoli & Fuhr, 1999) from “What’s in it for me? to “What are my alternatives?” to “How did this happen and when do I get my money?” Think about it; the following questions each stakeholder will want to know:

  • The causes of the company’s distress
  • Required steps to affect an effective restructuring
  • Management’s capabilities, abilities and costs to execute a restructuring plan
  • Assessing alternatives to the restructuring and the related costs
  • Determining the goals of the various stakeholders
  • Establishing the value that can be realized from company for a restructuring, a sale or liquidation of the business

Many issues can cause business distress. Liquidity constraints can limit the business from operating efficiently. Cash flows, cash reserves and access to a working capital line of credit can result in a short-term liquidity crunch. The inability to pay employees, suppliers, and the taxing authorities can be acute. This will lead the company to failure.  A business restructuring will be required.

Economic Downturn

An economic downturn, shifting buyer taste or behavior, increased competition, ineffective operations, disruptive technologies, incompatible strategies, issues that can seriously place the company into financial distress. Left unanswered can result in threatening the organization’s existence.   A host of problems will trigger declines in revenue, customer loss, key employees, profitability, and cash flows that will lead to working capital constraints. Distressed symptoms often occur well before crisis hits and is felt. Before you know it, the company is in a death spiral. This situation is not inevitable, and in many cases, can be halted and reversed. Taking aggressive action and discovering at an early stage through reviewing the organization’ strategies and it operations efficiencies can lead to a swift, decisive action to restore organizational performance and enterprise value.  Timely action is critical in making this happen.

When a company is doing poorly that failure appears imminent, only a restructuring or turnaround can restore performance and profitability that can enhance the value of the business.

The best way to learn how to restructure a business is to study failure.  Think about it, NASA studied its mistakes to make corrections with the space shuttle program. Pharmaceutical companies and financial services companies study product design failures to make improvements, and hospitals study their service offerings to improve the quality of healthcare service. Successful companies create value for shareholders, customers, and other constituents.

Many companies that once dominated their markets later slide into corporate distress often occur. These organizations lose their touch. It is often said that success breeds failure. Companies no longer have that “mojo” that touch, which creates shareholder value. When a company succeeds, we assume that they know what they are doing, but in fact it could be they got lucky. Companies create an overconfidence bias, becoming so self-assured that they think they do not need to change anything.

Business Restructuring

A number of factors influence a business restructuring strategy to achieve recovery. From an external perspective, in most part, the competitive environment and the maturing of the industry influence the selection and effectiveness of the turnaround strategies. From an internal perspective, the severity of the financial distress and management failure is a contributing factor to formulating the turnaround recovery strategy. The choice of the restructuring strategy is a function of the company size, management perception of the external factors, but most importantly, the degree of resource availability.

For a small business, given the exceptional high mortality rate, elements of decline and failure are important. Small business failure is generally attributable to issues of management control. Performance deterioration and resource availability are critical factors of for the enterprise success in addition to the strategies chosen to, in some cases, stop the bleeding.

Two organizations that have members that can effectively structuring and implement a business restructuring strategy include the Association of Insolvency and Restructuring Advisors (AIRA) where you can find a Certified Restructuring and Insolvency Advisor (CIRA) and the Turnaround Management Association (TMA) where you can look for a Certified Turnaround Professional (CTP).  Remember…tick, tick, tick the clock is ticking maybe to your business’s decline.

References:

DiNapoli, D., & Fuhr, E. (1999). Trouble Spotting: Assessing the Likelihood of a Turnaround. In D. DiNapoli, Workouts and Turnarounds II: Global Restructuring Strategies for the Next Century: Insights from the Leading Authorities in the Field (Vol. I). John Wiley and Sons.

PriceWaterhouseCoopers LLP. (2012, August 20). Restructuring and recovery. Retrieved August 20, 2012, from PWC: http://www.pwc.com/us/en/transaction-services/restructuring-recovery.jhtml#

 

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Business Failure: Business Success Can Breed Business Failure

“Corporate failure is never the results of a random set of events. It is normally a reflection of deep-seated corporate shortcomings.”

 (Chartered Institute of Management Accountants, 2012)

Business Success Can Breed Failure

We have all heard about the stories of companies that once dominated industry but later fell into business decline. There are many reasons for this. The usual suspects for business decline include becoming to dependent on existing customers, the inability to adapt business models to deal with destructive technologies, the lack of leadership, and focusing on short-term financial performance all have led to business demise. One reason not often mentioned for business decline is the hindrance of learning at both the individual and organizational levels about the true causes of business success. Success can breed failure (Edmondson, 2011). Learning enhances your capacity to face and respond to situations. However, from the business success perspective:

  • We draw wrong conclusions about the business success. We believe our success is because of the strategy, the talent, or the business model used is the cause of the success creating a false premise. Tombstone-of-Successful-Company
  • We fool ourselves developing an overconfidence bias. Although faith in ourselves strengthens our self-assurance to make a decision and execute a strategy, it can also breed closed mindedness and foster a “well if it worked before, it will work again” rational, which is not considering environmental changes and just plain luck.
  • We do not fully analyze the causes of the business success.  We will ferret the causes of a failure because we have to know why something bombed. However, we will not devote the time and resources to find out why the company was successful—again maybe because of false assumptions.

When companies catch the upward draft of success, the arrogance of the enthusiasm kicks in. Not surprisingly, the virus of success can become fatal in five or ten years (Kolind, 2006).  Think of Research In Motion (RIM) and AVON, companies in decline. The downdraft winds of business decline are a factor of the business life cycle.  The death cycle of business decline encompasses three factors: company size, company age, and company success.  One of these three factors can result in increase in:

  • The number of layers in management
  • The number of departments
  • The amount of formal procedures
  • The length in time the long-term planning process
  • The number of budget items
  • The amount of meetings
  • The quantity of reports

A problem is when the company loses its mojo. Success blinds management and causes lose touch with its customers.  Bureaucracy grows, information gets filtered and delayed, and arrogance breeds. Unfortunately, management will begin blaming others for performance slippage when the company begins to slide due to the downdraft of business failure.

Recommended actions include:

  • Question the causes of business success and failure.  Do not get stuck looking at the symptoms.
  • Do not get enamored at a cult personality be it CEO, advisor, leader or expert.  Question decisions and recommendations.  Remember, there is no such thing as a stupid question.  What is stupid is when you fail to ask the question.
  • Have strong, independent advisors and directors.
  • Complexity is the “fog of noise designed to hide reality.” Find and streamline to clarity.
  • Align pay and remunerations with risk.

References:

Chartered Institute of Management Accounting. (2012, February 15). Understanding the causes of corporate failure. Retrieved December 15, 2012, from Financial Management: http://www.fm-magazine.com/feature/depth/understanding-causes-corporate-failure

Edmondson, A. C. (2011). Strategies for learning from failure. Harvard Business Review , 89 (4), 48-55.

Kolind, L. (209). The second cycle: winning the war against bureaucracy. New York, NY: Pearson Prentice Hall.

 

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The Entrepreneurial Distressed Business: Assessing the Business Failure Signs

The Entrepreneurial-Based Business

The competitive dominance of entrepreneurial driven companies have historically forged the path of economic growth. Now at the time when such dominance is needed with a vengeance for prosperity and employment,  such owners are working hard to stay afloat and survive especially after the recent financial meltdown and the great recession.  The fundamental issue is that tools and the conceptual frameworks that work for traditional businesses must be modified to meet the challenges, operations, and new business models of today’s entrepreneurial-based companies.

When dealing with an entrepreneurial-based business, when the company is in trouble, recognizing this fact will give the owner more options for dealing with the problem to save the business. However, by waiting too long, being in a state of denial, not taking decisive action will leave the entrepreneur with little options other than shutting down the business or bankruptcy. Furthermore, the longer the owner waits, the likelihood that the owner’s personal finances will be affected, in the event that the owner’s are personally liable for the business debts. This can leave the entrepreneur filing for personal bankruptcy protection.

Signs of Distress

Every business is different. So the signs that the business is in trouble may not be the same for one company compared to another. However, certain warning signals are clear. The business may be in trouble if:

  • Revenue has been trending down for the past several quarters and below the budget.
  • Demand for the products or services have dropped off.
  • Loss of one of more important customers and being unable to find replacements
  • Finding it harder to fund working capital needs as cash becomes tighter and tighter.
  • Struggling to fund payroll
  • Being unable to service the debt or even meeting just the interest
  • The company’s debts being turnover to collection agencies
  • Creditors asking for more cash collateral
  • The bank is unwilling to extend additional credit or threatening to call the loan.
  • Using collected payroll tax money to fund operations instead of sending it to the government. [A major no…no!]
  • Key managers and staff have begun to quit

Bad to Worse

With symptoms like the above, conditions can transform from bad to worse. For example

  • The IRS is beginning action to levy company bank accounts and following other avenues to enforce collections
  • Suppliers and creditors threatening to sue to collect owed moneys
  • Secured creditors liquidating collateral
  • Eviction notices received covering rented facilities
  • Key suppliers requiring cash, no credit

Entrepreneurial Options

Options that may be to the entrepreneur include:

  • Selling of the business in entirety
  • Liquidating the business through bankruptcy
  • Selling off parts of the business
  • Saving the business through restructuring or a bankruptcy reorganization

When the business is heading towards the “zone of insolvency,” the entrepreneur needs to first decide whether or not to stay in business. This is an important decision. Deciding on whether to cut off a cancerous limb to stop the infections or to treat it must be made.

Decision Factors

For an entrepreneur, emotions and egos must be set aside. Issues to be considered must include the welfare of the family and self.  Moreover, reflections must be made questioning:

  • The ability to raise fresh capital, and
  • The capacity to obtain the capabilities needed to turn around the business, which is like changing the direction of a battleship whether it is a small, medium size business or large corporation. Can enough momentum be directed toward business renewal?

Not all distressed businesses can be saved. Knowing if the company can be salvaged and which ones have little or no chance of survival is important.  The sooner that decision is made; the sooner steps can be taken to either begin the process of business turnaround or winding down the company.

Turnaround Basic Questions

Basic questions or requirements that are needed for a successful turnaround must have four characteristics:

(1)  Does one or more viable core businesses exist within the enterprise?

(2)  Can adequate bridge financing be obtained?

(3)  Does the company have sufficient organizational resources and skills

(4)  Can the company secured a turnaround manager (leader) to facilitate the daunting restructuring task?

Professional Advice

Having poured their hearts and souls in to the business, the entrepreneur must try to be objective about the prospects for the future. Although emotional attachment is there, they should seek professional advice from other entrepreneurs, lawyers, and accountants for recommendations of turnaround professionals. As a start, the membership of the Turnaround Management Association comprises of specialist (Certified Turnaround Professionals) in the area of business turnarounds.

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For a  free online accounting mini course “Cracking the Accounting Code” designed for entrepreneurs go to http://AccountingMiniCourse.com

 

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10 Key Reasons Leadership Causes Business Failure

What is the most important responsibility of leadership? Simply put, leadership is to identify the biggest challenges to forward progress and to devise a coherent approach to overcome them. This rule includes providing vision and motivation and to act as the change agent. Sounds nice. But in today’s competitive and volatile business climate, one cannot afford poor leadership, as business is not as usual.

Let us strip away at the excuses, explanations, rationalizations, and justifications for business failure; in the majority of cases it is because of management. In an honest analysis, it is plausible to say, “poor leadership” can lead towards corporate insolvency. Leaders will accept the kudos of business success; however most will not take the blame for business distress, which goes with the territory.

I recently read an article by business adviser Mike Wyatt about common leadership reasons for business failure. As a restructuring professional, it is plainly true that the number one cause of business failure is management. And in most cases it is because the leaders are “in a state of denial.” The common leadership reasons for business failure, and the roles and responsibilities they play are as follows:

  1. Lack of CharacterWithout strong character attributes encompassing ethics, a leader cannot effectively lead without the trust, confidence, and loyalty required by employees. For most, title means little when the leader garners character flaws. And respect is earned. So a leader must remember, that “when the fish stinks at the head”, the fish is bad. With the crisis of confidence in Corporate America brought about by the boards of Enron, WAMU, etc., character plays a key role in the viability of a business failure.
  2. Lack of Vision: The CEO must clearly define and communicate the corporate vision. Without vision, a flawed vision, or a poorly communicated vision, executive leadership has a problem. Moreover, if the vision is not in alignment with the corporate strategies and targets, the business will shortly be in trouble.
  3. Poor Branding:  Poor branding generally means poor leadership. Brand equity, if declining, must be blamed on the leadership.  You must question whether the leadership abdicated their responsibility while an erosion of brand equity is taking place. It is a failure in the alignment of vision with strategy for allowing the deteriorating of a brand’s promise.
  4. Lack of Execution: It all comes down to execution; the implementation to ensure a certainty of execution is primary for executive leadership. Leadership must focus on deploying the necessary resources to ensure that the largest risks are adequately managed, and/or that the biggest opportunities are exploited to avoid failure.
  5. Flawed Strategy: A flawed strategy simply reveals weak leadership. While there are exceptions to every rule, companies tend to succeed by design and fail by default. Show me a company with a flawed strategy and I’ll show you an incompetent leader.
  6. Lack of Capital: Even well capitalized ventures fail and severely under-capitalized ventures grow into dominant brands. A lack of capital can provide a socially acceptable excuse for business failure, but it is not the reason businesses fail. Cumulating working capital and permanent working capital is ultimately the responsibility of leadership. The amount of capital required to fuel a business is based upon how the business is operated. The reality of capital constraints is a factor leadership must recognize. If leadership squander the opportunity to obtain sufficient capital, irrespective to capital formation, the business will feel the results.
  7. Poor Management: The choice of recruiting, mentoring, deploying, and retaining management talent is up to leadership. Thus it is leaders blame if is fails to act to correct mistakes, change direction, or effective execute of strategy.  It is the job of leadership to recruit, mentor, deploy, and retain management talent.
  8. Lack of Sales: The lack of coherent strategy, pricing, positioning, branding, distribution, or compensation impacts revenue. A lack of sales is ultimately attributable to a lack of leadership.
  9. Toxic Culture: Culture is important in business, whether it is a culture of working at Google, IBM, or at the Red Cross. It is up to leadership to recognize and “cut out” the individual or individuals that poisons a culture of a business. Nothing stifles productivity and creates conflict like a toxic culture. Hiring management or employees with different cultures must be examined to determine if issues will be developed.
  10. No Innovation: Remember, even Kodak was innovative, but have faltered from global competition. Leaders must create a culture of innovation or they will fall on the innovation sword. Innovation must be mission critical. As an example, textile maker, Milliken & Co., leveraged innovation to effectively compete. The strong bias for innovation by great leaders constantly recreates businesses and generates new opportunities. Leaders that are slow-moving towards innovation will doomed the business.

For leaders, the bottom line is that—businesses do not fail, the CEO, the entrepreneur, the leader does. A self-realization in the leadership sphere would result in an understanding that the responsibilities in operating at the C-suite level requires match the talent with the duties that goes with the territory. Is this easy? No! If so everyone would be a CEO or entrepreneur.

 

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