The accident scene at a business crash has a surprising similarity to a traffic accident when it comes to triage, first aid and recovery. Dealing with a business crisis is similar to giving first aid at an accident site. You check for life, give mouth-to-mouth resuscitation, and stop the bleeding. When the breathing is ok and the bleeding is stopped you can call for an ambulance and get medical help.
Checking for Business Life
Some businesses cannot be saved. The first task is to see if it is worth the attempt. If the current assets have good realisable value and the current liabilities are not too overpowering there is a chance of recovery. The chance is significantly improved if there are strong fixed assets on the balance sheet such as land and buildings.
Breathe Life back into the Business
Cash flow in a business is like you and I breathing air. The immediate need for a crashed business is to maximise positive cash flow in whatever way possible. The survival of the business often depends on how decisively you take action. All possible sources of cash must be explored including:
- new working capital
- new bank debt
- extended supplier credit
- selling off stock
- encouraging cash sales
- collecting from your debtors (accounts receivable)
- – or selling them (factoring)
- selling off any surplus equipment
- leasing rather than owning equipment where possible
Although asset sales will bring in cash, take care not to handicap the firm’s ability to produce and create revenue. If you have no more funds to put into the business, unencumbered assets may be used as collateral to secure further debt finance. The costs must be evaluated along with the reaction of existing creditors to the fact that you are taking on further debt.
If you cannot borrow more cash, or if the amount you can borrow is not enough, then you will need to look for sources of new equity. It is not easy to interest an equity investor in a troubled firm. In some cases a creditor may be willing to exchange their debt position for an equity position, thus reducing the need to service that portion of the existing debt. There are turnaround investors who are experienced at seeking out and investing in financially troubled firms. They look for a high return in the future when the turnaround is successful and they can re-sell their equity in your firm.
Stop the bleeding
Immediately stop all non-critical payments in order to reduce the flow of money out of the business.
- Cancel expenses that are not essential to immediate survival.
- Staff that are not immediately needed should be released. You should involve the staff as much as possible in the crisis decisions and treat people fairly, giving help where possible to find other jobs or to resolve other personal situations. It is essential that remaining staff feel motivated and part of the team if your business is to pull out of trouble and this may depend on how you handle the redundancies.
- Reduce wages and salaries.
- Reduce insuranceto a prudent minimum.
- Sublease any surplus space.
Ask for help
Ironically the only people who can really help are your creditors. The only way to survive a serious business crisis is with the co-operation of the people you owe money to, so you need to include them in your recovery plan. Making special arrangements with creditors means being open and honest with them because you need their trust. Supply must continue, even if it is on a COD basis. Past debt cannot be paid out of current sales, but must wait for profits generated by a successful turnaround. A common process is to ‘park’ all past debt in a number two account and for the situation to be to be reviewed in six months. Creditor negotiation is critical to recovery.
Defensive Driving for Business
There are eight key points in the business model of any business – four on the Income Statement and four on the Balance Sheet. Focusing your management attention on these eight can help you avoid drifting into trouble in the first place.
- Increase prices. Price needs to reflect value, so focus on changing the market’s perception of value and work at premium pricing your product or service. Continuously innovate around the product and the customer experience.
- Build volume. Create innovations in your channels to market using social media and webpage digital marketing. Expand your market into new regions – and find new customers.
- Reduce direct costs. Use ‘Lean’ business methods to eliminate waste, reduce costs and increase margin.
- Minimise indirect costs. ‘Lean’ methods and tools can also reduce waste here also.
- Reduce debtors. Always know who owes you money and phone them each week to get the cash coming in.
- Reduce inventory in manufacturing or retail, and reduce work-in-progress in service companies. Use ‘Lean’ methods to reduce process cycle time and other wasted resources.
- Reduce fixed assets. Divest non-core assets and rent or hire others that you don’t use often.
- Maximise supplier credit terms. Negotiate better credit terms by actively building relationships with selected suppliers.