Every business entity is different. Signs of financial distress of one company may not apply to another. Notwithstanding, common problems most companies experience tend to be warning signs, signals, of pending trouble regardless of type of business, industry, size, etc.
Your company may be experiencing these types of symptoms:
It is normal human nature to avoid difficult problems and put off dealing with the issue. Hence, you may minimize the business problems or assume that time is on your side and it will go away. It will not!
Reality is here. As a manager or entrepreneur you must avoid being in a “state of denial”. These problems will not go away. When the business is heading downhill, you must decide whether or not you want to remain in business. This is an important issue to must not be put off.
Spend some time thinking about what you are going to do. It is critical that you think with your head and not with your emotions. Put aside your ego, sentiments, and pride. Think of what is best for you and your family. Family will be affected by your decision. Consider the following:
Do not underestimate the time, effort, and commitment required of any choice. Not to mention the amount of money it will take to meet the challenge.
If you decide that you want to save the business, know that the potential benefits outweigh the sacrifices you and your family will have to make. So think clearly about the options.
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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:
Bad to Worse
With symptoms like the above, conditions can transform from bad to worse. For example
Options that may be to the entrepreneur include:
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.
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:
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?
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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First, there is no hard rule or definition as to what constitutes a corporate turnaround or a corporate restructuring. The generic term is a company or firm or business unit that exhibits financial performance that in the foreseeable future, unless short-term corrective action is not taken, may fail. Let us say:
A corporate restructuring or turnaround may be simply defined as a company’s existence is threatened as it moves from economic performance to decline or zone of insolvency. The decline or bankruptcy may take several years, however when extreme events take place, a shorter time frame may put the enterprise into peril.
In some circumstances the term may mean a financial restructuring by reorganizing and/or cleaning up the balance sheet using financing methods that changes the capital structure of the organization.
Surprisingly, a turnaround can be a situation where a company may exist without having a cash crisis. When measuring a company’s performance, as measured by return on capital employed, the turnaround candidate can be an organization that is performing below what is expected for a business in which it is engaged. It is about recognizing that a company often displays symptoms of failure prior to any crisis beginning. It could be businesses with underutilized assets and poor management. Many companies have survived or stagnated for years in spite of ineffective management. If such stagnation does not change, the crisis situation will succeed because management has not taken the necessary steps to turn the situation.
Crisis situations are often in stable and mature industries and sometime with competitive advantages. Such companies are also firms that are closely held or family controlled. To avoid placing the enterprise in a crisis, it is about early instituting turnaround and restructuring strategies to avoid company trauma. Too often even a growth-oriented company that has grown too fast and is very profitable may experience a severe cash crisis. Alternatively, a company can report a loss in one year does not constitute a turnaround issue. Such a loss may be expected in executing a competitive strategy. However, a loss in one operating unit may place the whole company into a death spiral.
A company can become insolvent if management takes no corrective actions. Even external events may postpone the inevitability on insolvency, but it will not avert it. The outcome of management’s corrective action either will be successful or unsuccessful in which case the insolvency will lead the company into bankruptcy.
Generally, a corporation’s life cycle can be looked at as a humped curve of four stages. From (stage-1) start-up the company grows to a point of (stage-2) maturity then begins to (stage-3) decline until it reaches (stage-4) the “zone of insolvency“. Not all businesses follow such life-cycle curve, since organizations can be reborn or transformed anytime. Some companies, in fact, institute competitive strategies that change the shape of the curve to an S-Curve to progression. The corporate turnarounds logically addresses two issues:
Defining turnarounds on the basis of profitability (return of assets or return on investment) alone is problematic. The accrual quality of the turnaround company’s accounting may be low and result in manipulated earnings management. Companies gradually lose competitiveness, but this is often not reflected in deterioration in profitability. Rather, earnings flat line then plummet or the time lag between competitiveness and earnings improvement exist. With management’s “window dressing” a lag in indices showing a distressed state, the signals of impending trouble can be masked.
Simply put, the framework of the turnaround is to avoid the company moving into the “zone of insolvency” and then ultimately into bankruptcy. Taking proactive strategies to control the business is the objective.
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