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A distressing situation: spotting the warning signs of a business in trouble

posted by Justin Ward on 22/10/2013
A distressing situation: spotting the warning signs of a business in trouble
 

Stress is an inevitable part of doing business. But when day-to-day stress becomes distress, it could be a warning sign of deeper problems.

When a business is in trouble, it doesn’t collapse straight away. In our experience, there are four stages a troubled company goes through (which we’ve detailed below). It’s important to note that by intervening at an early stage, company directors, bookkeepers and accountants can help to arrest this decline and ensure business continuity

Stage one: Management stress

In this stage, a previously well-functioning business may experiences an event outside of its control. This could include a fire that destroys critical equipment, or a public liability claim against the business. Alternatively the business for one of a range of reasons may be facing a general decline.

This raises the stress levels of directors because time and money is being used to address the situation or decline, reducing the company’s profitability and its ability to pay bills and meet other obligations.

Management are spending time dealing with the above issues, however they are able to continue to manage the business.

Stage two: Business stress

At this point, the events or accelerating decline identified in stage one is affecting the business more broadly. With less money coming in, there’s less money to go out and surplus funds may fall into deficit. As a result, it’s becoming more challenging to pay creditors on time. The strain has also extended to accounts payable staff who are dealing with increasingly agitated creditors.

Management are spending significant time dealing with the business issues and less time running the business. The operations of the business suffers as a result.

Stage three: Panic stations

The outlook for the business has deteriorated substantially. Not only is the company struggling to pay creditors, it’s now having trouble meeting its statutory obligations including PAYG, GST and employee superannuation. The Australian Taxation Office may also be pursuing the business for their outstanding liabilities.

General staff become aware of the issues facing the business and good staff are likely to jump ship, leaving those less skilled behind.

Directors are now focused 100% of their time on dealing with the business issue and creditors. Time to manage the business is further reduced, resulting in a further deterioration of the business.

Stage four: Keeping the lights on

The business’s problems have deepened and it can’t pay its financial liabilities as and when they fall due, including regular payments on assets such as vehicles and production equipment. As a consequence of missed payments, these items could be repossessed by finance companies and a business may lose the tools it needs to make money. Without the ability to earn revenue, it could be a battle to salvage the business.

At this stage staff retention becomes very difficult with employee entitlements likely unpaid.

Management spends every waking hour dealing with creditors, there is no time to resolve the issues identified in state one and two, or time to manage the business. This stage is almost always terminal.

Taking action

While this chain of events might make for sobering reading, the cycle isn’t inevitable. By recognising the warning signs and intervening early, company directors, and external accountants and bookkeepers can take steps to put a business on a more sustainable footing.

Where possible, stakeholders should focus on keeping a business alive. At Macleay Partners, we work hard to assist businesses resolve the issues identified in stage one and two. We’re a specialist turnaround practice with a commitment to business continuity. We present our clients with a number of options to help companies continue to operate.

If you’re concerned about how your business or client is performing, Macleay Partners can help. We offer a free diagnostic review to assess the state of a business, and identify strategies for improvement. For more information, please contact Justin Ward at justinward@macleaypartners.com.

About the Author

Justin Ward

Justin Ward / (02) 8211-2733

Justin is the Director of Macleay Partners. He brings a proven track record of delivering successful outcomes in difficult circumstances with diverse experience in areas of audit, consulting and insolvency.

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