By Nigel Morrison, advisory partner, Grant Thornton
Despite the difficult economic climate, business insolvencies in the UK are running almost at pre-financial crisis levels, and continue to fall. Why is this?
One of the principal reasons for the low business failure rate is the proliferation of the so-called “zombies” – those companies which generate just enough cash to service their debt, but little else, and which are preventing more ambitious organisations from moving forward.
In addition, low interest rates continue to mean that businesses are able to continue servicing their bank borrowings, while the Time to Pay legislation has given others more breathing space.
Of course the benign official statistics should not lead one to conclude that there are not plenty of businesses out there which are in distress – or in layman’s terms, having difficulty meeting their financial obligations on a daily basis.
As an advisory partner in the region, I encounter this situation in businesses of all sizes, and across all sectors. However it is worth pointing out that despite their diversity, distressed businesses often share a set of common characteristics, and looking at what these are in more detail:
A lack of management experience of turnaround or distressed situations – leading to a delay in, or reluctance to, introduce specialists and an inability to manage key stakeholders effectively
Sometimes a business owner will abruptly announce that he or she is “closing the doors” without having gone through any intelligent decision-making process. The real lesson here is that early consultation gives you options – the earlier the situation is addressed and expert advice and consultation is sought, the more management can retain control of the situation. The longer the situation is left to develop, the more management loses the initiative and other stakeholders, such as shareholders and lenders, and ultimately creditors, will take control.
A culture of complacency and inertia, and a lack of urgency
Very often, management is in a kind of self-denial whereby they remain bullish about the business’s prospects. The reality in fact, is that it is sometimes necessary to overstate the extent of the situation in which the business finds itself, in order to pull its stakeholders together. A sense of urgency is critical to any attempt to turn the situation around.
Continual fire-fighting and addressing the symptoms rather than the root causes
The causes of business distress are frequently rooted in operational performance. For example, one business my team and I worked with got into problems due to the supposedly erratic behaviour of some of its suppliers. However, on investigation the real cause of distress was revealed to be closer to home, in the shape of an inadequate purchase ordering system.
Superficial cost-cutting to address profitability issues
All too often the management of a distressed business will set about initiating staff and/or salary cuts without regard to service delivery. Businesses in this situation must think efficiency in terms of waste, delay and duplication: are the actions being taken actually going to create value in the business in the long-term – or destroy it?
The basic lessons for any distressed businesses then, are clear. A willingness to consult is a strength, so do it early. Understand and address the key stakeholders’ priorities. Ensure there is a real sense of urgency to turn the situation around. Cut through the symptoms and drill down to the root causes. Analyse operational measures and ask yourself whether these are really beneficial or necessary.
