Business in trouble? Get your head out of the sand

Ignoring the warning signs of distress will just make things worse.

by Nick Hood
Last Updated: 03 Nov 2016

It’s easy for businesses to end up in financial distress, and for those that do call in the administrators there’s often no way back. Research carried out by my firm, Opus Restructuring (using the analytical model of financial health monitoring specialists Company Watch), shows that 70% of business rescues attempted via administration in England & Wales over the past five years failed. 

The companies concerned have ended up in liquidation or being dissolved without a sale of the business as a going concern and the preservation of any of the jobs. Even where there has been a successful rescue, unsecured creditors like suppliers and service providers have ended up with a pitiful recovery of around seven pence in the pound. In over half of the rescues, unsecured creditors have received no dividend at all.

The figures are a stark reminder of how difficult business rescue can be. Restructuring and insolvency experts freely admit that they can’t hope to bring all businesses through the process unscathed. But the one common complaint they have is how far down the business decline curve most owners and managers leave it to seek specialist help. Calling in the workout Cavalry when the creditor Indians are already inside the stockade leaves very few positive options.

The business media is constantly awash with blogs about the warning signs of financial distress and impending failure. If you’re constantly having to cut deals with suppliers to delay payments or struggling to find the cash to pay everyone’s salary at the end of the month then you could be on the precipice.

But entrepreneurs are natural optimists imbued with a determination to grow their firms and a positivity that makes heeding these signals something close to a psychological impossibility. Pushing your head further and further into the sand is understandable, but very dangerous despite the inevitable fear of the extra cost it could involve for a struggling company.

Ultimately, this mental block is most likely to be broken by an outsider, whether it might be a supplier restricting credit or a funding source starting to ask awkward questions. Sadly, most businesses that fail are SMEs, who typically lack the sort of non-executive or mentor who will raise the alarm and insist on action being taken.

There are really two lessons to be learnt from this research, both giving the same message. For suppliers and other stakeholders, it is better to get involved as soon as you smell trouble and try to help your customer or borrower. The alternative is highly likely to be a hefty bad debt and the loss of a future revenue stream if the business doesn’t survive.

For owners and managers, get real and get real early while there is still something to save. Insolvency practitioners are pretty skilled at finding value in the most unpromising scenarios, but they aren’t financial alchemists able to turn commercial dross into glittering gold.

It’s hard to know what impact earlier action might have on the lowly administration success rate, but after over twenty years’ experience of trying to save businesses, it’s clear that every month of extra rescue time is vital. With concerted action, it would be good to think that positive outcomes might climb closer to 50%.

Nick Hood is a Chartered Accountant and was a licensed insolvency practitioner for over 20 years. He has also been a senior executive in a number of listed companies. He is the business risk adviser at Opus Restructuring 

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