Sometimes even the best companies find themselves in a period of crisis. Either the CFO didn’t inspect the company data enough. Or the company took on too much debt, tried to push through regardless and didn’t pick up enough new business. Or the management was ineffective.
But just because a company is in a financial crisis today, doesn’t mean that it is going to go out of business. Each year dozens of failing companies are brought back from the brink. And it’s not done through sheer willpower or luck. It’s about prudent financial management and honesty. So where to start?
Identify The Problem
Many companies fall into the trap of thinking that their profitability is being damaged by only one factor. But there is never a single metric that identifies a company in crisis adequately. In fact, company profitability is usually down because of the number of interrelated factors.
Profitability in the industry might be under threat from worsening industry fundamentals. The company’s financial position might be on its way down because of a decline in the stock price. Liquidity might be under threat from worsening vendor terms. And employees might be more costly because of increasing unionisation.
Deciding on which factors and related to your business’s crisis is the first step. This means that you need to reject any preconceived notions about what is causing your problems and actually delve into the data.
Buy More Time
Often companies plan out their incoming and outgoings well over the course of a year. But they don’t account for the periods within that year when cash will be tight, or when they might need to borrow. Cash flow issues have led to the end of many businesses that were otherwise viable in the long term.
Sometimes when this happens, it seems as if the only option on the cards is to put the business into administration. But, of course, the directors lose control of the company, and its future is lost.
If your business in crisis, however, you may find that you benefit from company voluntary arrangements. Company voluntary arrangements allow the directors of the company to stay in control. Of course, they need to convince the creditors that the business is ultimately viable. But if it is, it should be possible for the directors to negotiate a settlement with the holders of assets to allow the business to continue.
Keeping on top of your business plan is the best way to avoid financial distress further down the line. When you set out your business plan, quantify your objectives. Don’t just settle for staying in business; state explicitly how much money you need to make from a certain product by a specified date.
If you fail to meet your objectives, be ruthlessly honest with yourself. If you fail to meet financial goals, resolve to change immediately your direction. Observing trends in the rest of the industry should tell you whether this is a problem with your company in particular, or with the sector as a whole.