ColorBlind-Opener

Is my business “at-risk” and how would I know?

 

Our whole focus at Galloway is about working with businesses that are “at-risk” and getting them onto a solid footing again.

So we see this every day of the week, and over time we have developed a real intuition about what “at-risk” looks and feels like. When we walk into the business, it feels like worry and anxiety, like something bad is about to happen. That’s probably because often, it is.

The problem mostly is that the business owners and managers have become immune to this feeling. To them it feels like business as usual. To them, this is what business feels like – pressure, anxiety, tension. This is why many of them get into trouble, because the feeling has to really ramp up for them to feel threatened, and by that time, the situation is often dire. In some cases it is beyond repair.

On the face of it, most of these businesses are still functioning quite well and their clients and staff haven’t yet seen the cracks start to appear. So if we ride into town and say “Our intuition tells us something isn’t right here”, it just usually isn’t strong enough evidence for the owner. We need something stronger than that.

So we have come up with a list of 14 indicators that we use when we sit down with a new client to show them that they need to take action quickly.

The indicators are in 3 categories – Financial, Commercial and Personal. If you have experienced any of these, calamity could be arriving on your doorstep soon. It wouldn’t be a bad idea to give us a call.

The first category is Financial indicators:

Cashflow – if you don’t know your break-even point then you are a ticking time bomb anyway. But as long as your cashflow is coming in under your break-even, then you are not only chipping away at any financial reserves you might have, but you’re probably building up a liability with the ATO as well….which brings us to #2….

ATO debt – if you owe the tax office money that you can’t pay – either GST, PAYG or superannuation, then you have problems, because you either need to find money from somewhere to pay it, or else arrange a payment plan with the ATO which puts more pressure on your cashflow. See point 1.

Late paying debtors – if you are not managing your debtors effectively then you have to finance your own operations until your customers pay you, which means you need more cash. In tough times, lots of businesses fail this way. Their customers pay slowly and they don’t have enough money to go on. If customers are paying outside your terms, then that is reason for concern. Also it is worth looking at recent trends, such as “Are previously good clients paying slower?” or “Are your average debtor days growing?”.

Nervous creditors – if you owe money to suppliers and vendors that you can’t pay, then you are technically insolvent. The definition of insolvency is that “you cannot pay your debts as and when they fall due”. Particularly if you are insolvent and are trading as a company, then you are breaking the law.

Ailing balance sheet – there are several clues as to the health of your company here, particularly the level of debt you have compared to the amount of equity you hold. This is not a technical paper on financial measures, so let’s not go deeply into debt equity ratios and so on. The main point is that many clients we see, don’t have an accurate balance sheet to start with, so they are flying blind.

 

These are common financial problems, and most of them are symptoms rather than causes, that is, they are caused by some sort of other issue. Cashflow, for instance, doesn’t generate itself. It is really just a measure of how fast you’re travelling, a bit like the speedo on a car.

Financial problems are mostly caused by Commercial indicators, such as:

 

Poor sales – sales go down for several reasons, but mainly it is either a) the industry is declining; b) the company’s product is substandard or irrelevant; or c) the salespeople aren’t doing their job, or aren’t able to do their job. If your sales are on a downward trend, there are hard decisions to make.

Lost contracts – we often see businesses, particularly those that do a lot of government work, that end up heavily reliant on one or two contracts. Suddenly the contract comes up for renewal, someone else wins it, and our guys are struggling, having lost 30-40% of their work in one fell swoop. Tendering is a critical skill in contract based business, and so is keeping your work up to scratch so that you win the contract again next time.

Flawed management systems – something that has amazed us in 2015 is the number of businesspeople who are running old, out of date, in some cases, manual, financial management systems. It is also amazing how many advisers are not switched on to new cloud systems and can’t help businesses with the transition. Poor systems give bad information which leads to bad decisions.

Bad or no inventory management – inventory typically ties up quite a bit of working capital. If the balance sheet is a bit tight, inventory is a good place to look for leeway. But when the control systems are rubbish it is hard to know just how much stock there is. The other problem is tracking whether parts, components and supplies have actually been sold and charged, or possibly lost or stolen. Plenty of companies have been brought down by inventory fraud.

No strategy – the first question we usually ask is “What is the plan for the business, and can we see it?”. In the last two years only about 2 clients have been able to produce a business plan of any sort, and only one of them could actually explain it!

 

Good commercial systems rely heavily on motivated and knowledgeable people to run them, and so the “effectiveness pyramid” if we want to call it that, has to have a broad base of smart people running the show.

So it won’t come as a surprise that when businesses end up “at-risk”, it is usually evident in the Personal indicators:

 

Wrong people in the wrong roles – we see this all the time. People who should never have been given the roles they have, dragging a company down. Most SME’s haven’t learned the art of good hiring and are still in the groove of hiring mates, family members and randoms as they come across them. Usually they create more problems than they solve and often place the business at-risk.

Divorce – divorce is a massive business killer for two reasons – first, it necessitates a division of assets which can devastate the balance sheet; and second, it causes a massive distraction for the leaders of the business. Combined, these two things almost always place a business at-risk.

Depression and medical disorders – running a business is a high stress occupation, especially if it isn’t going well. And when owners or key staff hit the wall, even if they get treatment, they often aren’t in great shape to lead people and make quality decisions. This can be downhill turning point and usually doesn’t end up well if owners and managers don’t get help to manage through it.

Loss of key staff – in businesses where there are relatively small staff numbers (<20) and where key people have been there since the beginning, the loss of one of these people often creates uncertainty and inefficiency amongst the remaining staff. Leadership skills and quality recruitment are needed to keep things on track – usually business owners need help with this.

 

These are just some of the indicators that show when a business is at-risk. On their own, they don’t always cause business failure, but with two or more combined, the risk of failure goes sky high.

The point? If these things sound familiar, you should call us, or call your accountant and get them to call us. We can work collaboratively with your accountant and your bank to get you back on track. It usually takes 1-3 months and it’ll take a weight off your shoulders.

 

Contact us here.