Why doing nothing is never a good idea

Early recognition that a business is in trouble and swift action can maximise the chances of survival in these difficult times, says Barry Lynch

In the current business climate of economic doom and gloom, spiralling costs, credit crunches, indebtedness, tightening credit lines, staff layoffs, weakening order books, margin pressures etc, it’s no wonder many business people in small and medium sized enterprises are concentrating on survival for the immediate future.

Running a tight ship is imperative in recessionary times, ensuring that overheads are in line with the current level of business.

Some variable costs such as salaries, labour and discretionary spending can be quickly adapted to changing economic conditions through staff redundancies and cutbacks. Fixed costs such as property rents, leasing finance and bank loan interest can be more difficult to manage in these testing times.

There are numerous signs of looming financial business problems such as increasing bank overdrafts, difficulties in paying creditors, rising stock levels, falling order books, loss of contracts, telephone calls from Revenue, bank and creditors, followed by letters from credit controllers, cash on delivery requests and solicitors’ letters and enforcement agencies. These are symptoms of an underlying problem in the business which may be due to adverse cash flow, bad debts and poor credit control or loss-making activities, or a combination of the aforementioned.

There are three clear and distinct steps to minimising business failure and maximising survival rates in the current climate, namely early recognition, accurate assessment and devising an achievable action plan.

EARLY RECOGNITION

The sooner a potential problem is flagged, the easier the solution is found. Early recognition of a problem is critical in enhancing business survival prospects. The signs are there for all to see and the sooner the owner/director seeks professional help and advice, the better chance of stemming the flow and instigating a successful recovery plan.

Many business owners/directors take it personally that their business is experiencing turbulence and feel isolated in such circumstances. Doing nothing is not an option as the situation is likely to get worse unless corrective action is taken.

Delaying action or decision making will only exacerbate what is already a difficult business position and will ultimately make the solution more difficult to implement and achieve.

Some owners/directors will experience a period of denial, hoping that things will turn for the better. This misplaced optimism rarely delivers the desired results and unfortunately leads the business further into debt. It’s not getting into difficulty is the issue more so the early recognition of the signs and taking the necessary professional advice to minimise the downside and maximise the business upside.

ASSESSMENT

Just how bad is it? This normally depends on the optimistic or pessimistic disposition of the particular owner/director. People with long memories may feel things are much better/worse than the last recession in the 80s. Better or worse is relative to the norm and has little relevance in devising a business strategy for survival and success.

It is necessary to produce a current Statement of Financial Affairs from available financial information. If the information isn’t available, then it is incumbent on the owner/director to ensure that such information is available. This is critical and its accuracy is vital. Going off with a half baked solution will not help.

A Statement of Financial Affairs will clearly establish the net asset/net liability position of a business, simply put, has the business got more than it owes? Liquidity of assets is critical.

It is also necessary to determine the profitability or otherwise of present operations. This can be established by analysing the most recent Financial Statements or Management Accounts.

We are now getting to a position where we can assess with a fair degree of confidence the magnitude of the problem and also the likely course of action that one should take.

ACTION PLAN

Prior to discussing our course of action, it is essential that company directors and business owners operate responsibly in times of difficulties. Where a business continues to trade, knowingly incurring additional debts and weakening the position of existing creditors, it may be deemed to be reckless trading and the directors held personally liable for the company’s debts.

One must always be optimistic in these situations and believe that there is a better way. Things are never as bad as they appear and there is normally a solution to improve the owner/director’s present position. An owner/director has a right to earn a livelihood and this should never be forgotten. Changing the current legal structure of the business (sole trader to limited liability company or vice versa) is always an option and one that is very often used. Drawing a line under existing difficulties is part of the solution, dealing with these issues in a responsible manner and equally planning for the future is what’s required.

One can learn from past experiences and ensure that previous business mistakes are not repeated.

In essence, a business can either trade out of its existing difficulties with an appropriate plan of action or alternatively cease trading and consider alternative business structures for the future. (Dealing with past business liabilities such as banks, Revenue, creditors etc is manageable, once correctly advised and addressed).

Acting responsibly and honestly is imperative and you will be respected for it.

Remember that there is always an alternative to present difficulties, and taking the correct advice through early recognition, assessment and action, will invariably enhance business prospects of survival and recovery.

* Barry Lynch has over 20 years experience in corporate recovery andinsolvency. He is principle in PF Lynch & Co, accountants & taxation advisers.