WHAT YOU NEED TO KNOW

In a challenging economic climate, even the most sophisticated business can fall prey to volatile market conditions and cash flow pressures. A quick response to the signs of company turmoil is crucial to turning the situation around.

One of the major drivers of business failures is that business their models were not challenged and strategic action was not taken when these businesses started to find themselves in a tight financial position.
In these situations, it is vital that an appropriate turnaround strategy is implemented quickly to allow the business the best chance to survive and avoid a formal insolvency appointment.
The following is a broad overview of the major steps in turnaround strategy how such a strategy would play out in the real world.

Analysing the situation

Determine the chances of the business’s survival, identify appropriate strategies, and develop a preliminary action plan.
Questions to be asked

  • Is the business in imminent danger of failure,
  • does it have substantial losses but its survival is not yet threatened, or
  • is it merely in a declining business position?

The three major requirements for the viability of an organisation must be analysed. They are:

  • one or more viable core businesses
  • adequate available financial resources
  • sufficient organisational resources

Should the above requirements be present, the following should then be undertaken:

  • A detailed assessment of strengths and weaknesses in the areas of competitive position, engineering and R&D, finances, marketing, operations, organizational structure, and personnel
  • Stakeholder communication should be increased
  • Develop a strategic plan with specific goals and detailed functional actions
  • Management must be accountable to deliver these goals.

Implementing the plan

Should the review identify any major financial issues, a turnaround plan must be implemented. Some common steps in a turnaround plan include:

  • determine the current labour requirement and rationalise workforce where needed
  • close underperforming business units and return focus to the organisation’s core business operation
  • change management team and structure,
  • eliminate any unprofitable lines of business where possible,
  • identify any surplus assets and determine if these assets can be realised in a timely manner,
  • eliminate any unnecessary capital expenditure,
  • improve the accounts receivable collection process,
  • focus on the cash flow of the business,
  • communicate with financiers and creditors
  • continue to focus on service for customers
  • seek advice from advisors.

Moving forward

In the final step of a turnaround, an organisation slowly returns to profitability. While earlier steps concentrated on correcting problems, the final stage focuses on profitability and return on equity, and enhancing economic value-added. For example, the company may initiate new marketing programs to broaden the business and customer base and increase market penetration. It may increase revenue by carefully adding new products and improving customer service.
This final step cannot be successful without a culture shift as well. Rebuilding momentum and morale is almost as important as rebuilding return on investment. It means a rebirth of the corporate culture and transforming negative attitudes to positive, confident ones as the company maps out its future.
The key in any turnaround is to take action early and seek appropriate advice from your advisors before the situation is taken out of your control.

For more information on corporate insolvency review the resources below or contact us today.

CORPORATE INSOLVENCY KNOWLEDGE & ARTICLES

DEBT RECOVERY
If a creditor is owed money by a company, there are many ways they can seek to recover it. Directors and companies should be aware of their rights and obligations in the event that debt collection processes are in full swing and the company is exposed to legal action and enforcement.

CREDITORS
Taking an interest in the liquidation of a company that owes you money may help you to secure a better financial return. Whether you’re an employee who is owed wages or a supplier seeking payment, here is an overview of the rights and obligations of creditors in insolvency.

CREDITORS’ MEETINGS
When a company goes into liquidation, the Liquidator will use a Creditors’ Meeting to communicate with the creditors about the progress of the liquidation and to seek approval or guidance from creditors. In the case of Creditors Voluntary Liquidation a creditors’ meeting is required to be convened within 11 days of the appointment of a liquidator.

DIRECTOR PENALTY NOTICE

One of the most powerful tools wielded by the Australian Taxation Office is the ability to issue a Director Penalty Notice (DPN) against company directors for certain company debts including PAYGW and SGC. Serious implications flow from non-compliance with the ATO’s requirements it pays to be informed, upfront, lodge company statements on time and to maintain good order in the books.

EMPLOYEE ENTITLEMENTS SAFETY NET
When a Director is contemplating putting their company into liquidation, one of their biggest fears is that their loyal and hardworking staff won’t be paid their entitlements. Fortunately there is a government safety net that protects employee entitlements in these situations.

INSOLVENT TRADING
Insolvent trading occurs when a company is unable to pay its debts and continues to incur further debt. When a company is experiencing a cash flow or liquidity crisis, it is important that its directors and officers consider the company’s ability to pay all of its debts as and when they become due.

LIQUIDATORS’ RECOVERY ACTION
The Corporations Act 2001 (Cth) (Act) permits liquidators to recover certain transactions made within a set period before the commencement of a company’s liquidation. These transactions are known as “voidable transactions”.

CORPORATE INSOLVENCY: AN OVERVIEW
A formal insolvency commences when a company is unable to pay its debts, prompting the appointment of an external administrator. Understanding the overall insolvency framework can assist you to lessen any financial and emotional impact as you move through the complex insolvency processes. The three most common types of formal insolvency appointments are Voluntary Administration, Liquidation and Receivership.

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