we have answers.
This will vary from organisation to organisation.
Most businesses in distress display more than one of these signs of trouble:
1. Ineffective Management Style
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Dominant Chairman or Founder.
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Weak board of Directors.
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Risk of dishonesty or fraud goes undetected, unreported or ignored.
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Management has no feeling of vested ownership in the business.
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Succession issues – extreme case where Chairman or Founder suddenly becomes.
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Incapacitated or dies, the entire company is in danger of collapse due to leadership void.
2. Over Diversification
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Pressure to diversify to reduce risk.
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Spread its resources to thin – managerial, financial and competitive resources.
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Business becomes vulnerable, loss of market share.
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Loss of competitive advantage.
3. Weak Financial Function
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Excessive debt, stringent covenants, and inadequate equity capital.
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Credit is overextended, inventories are accumulating, and fixed assets are underutilised.
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Poor working capital function.
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Poor capacity utilisation and inefficiencies.
4. Poor Lender Relationships
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Poor communication channels.
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Concealment of financial information.
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Telephone calls not returned.
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Interim / periodic reports late / not provided.
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Once a bank loses faith or confidence in management, they usually move to protect their security interest. E.g., appoint an Investigative Accountant / R & M.
5. Lack of Strategic and Operating Controls.
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No strategic plan guiding decision making process.
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Operating without adequate reporting, accountability, and responsibility framework.
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Decisions based on inadequate, untimely, or inaccurate information can make a bad situation worse.
6. Market Lag
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Changes in products have bypassed the company, leaving it with sagging sales and declining market share.
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Where is the deficiency – technology, equipment, products, services have become obsolete.
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How sales and marketing is done and has changed.
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Retail.
7. Operating without a Business Plan
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Business plan may exist in everyone’s head rather than in writing. The result is that plans are carried out according to individual interpretation or plans are inadequately communicated to employees.
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Like a doctor completing surgery without knowing what the operation is for and desired outcome.
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How can you understand a business’s funding requirement when the future plan is not clear.
8. Explosive Growth
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Rapid and uncontrolled growth.
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Often overlook the effects of growth on the balance sheet and the cash requirements of funding it.
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Growth often carries very high capital investment requirements, including significant investments in R&D, capacity, and working capital.
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Leveraging to a point where this is little or no margin for error. Poor tendering processes and job costing procedures.
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Growth can lead to overload of capabilities.
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Growth beyond its ability to manage.
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EG – recent mining frilling company.
9. Risky Customer Base
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Relies on a few big customers.
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Construction group.
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Credit checks, debtors insurance, personal guarantee exposures.
10. Family Vs. Business Matters
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Family issues can cause business decisions to be made on an emotional basis rather than on sound business principles.
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Sibling rivalry.
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Deciding which relative should run the business after the founder’s retirement or death can be one of the most difficult challenges a business can face.
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Divorce can also shatter a business, leaving it in fragments.
The most common causes of business failure
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External economic factors (economic downturn, high interest rates, downturn in consumer spending, pandemic etc).
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Experience causes (Internal factors related to management such as inexperience or lack of skill).
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Internal financial distress, and weakening internal figures, commonly related to:
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Liquidity or cashflow issues.
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Level and/or volatility of profit.
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Leverage (level of debt).
A business that is underperforming may benefit from working with a turnaround professional for several reasons:
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Expertise: Turnaround professionals have specialized expertise and experience in helping struggling businesses identify and address their challenges, develop and implement solutions, and achieve sustainable growth and profitability.
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Objectivity: An outside perspective can help a business identify areas for improvement that might not be obvious to those who are closely involved with the company.
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Urgency: Turnaround professionals can bring a sense of urgency to the situation, which can help the business address its challenges more quickly and effectively.
When to act: It is recommended to seek the help of a turnaround professional when a business is facing significant financial distress or operational challenges that are impacting its ability to meet its obligations and achieve its goals. The earlier a business acts, the greater its chances of successfully turning itself around.
However, it’s important to note that turnaround is not a one-time event but rather a continuous process of identifying challenges, developing and implementing solutions, and continuously monitoring and improving the business.