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Insolvency and turnaround: Is your company in danger of becoming insolvent?

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Is your company in danger of becoming insolvent?

Many consider the risk, but too many fail to raise the red flag. As I recently noted, troubled businesses that wait too long to seek financial help end up hurting the Australian economy – to the tune of $13 billion every year.

That’s why I welcome the present reform initiative by the Federal Government and the ASIC to encourage directors to seek help earlier.

The main reforms are based around the notion of creating a “safe harbour”. In this scenario, a director who engages a turnaround professional (or other advisor) to help restructure/turn around their business would be protected for a period of up to 3 months from insolvent trading issues whilst the turnaround plan is being developed and executed. That way the director can make an informed decision on the merits of continuing on without the threat of potential insolvent trading issues affecting their decision making.

The other main option is to provide a director with a defence against insolvent trading if they had sought professional advice, felt confident in the turnaround plan that had been developed, and followed the plan.

Given that most turnarounds take 12-18 months to complete, we feel that the second option would provide a more practical outcome and encourage more directors to seek help from a turnaround professional.

How can turnaround help?

Turnaround is a relatively new industry in Australia. Turnaround specialists work separate from the insolvency industry and are committed to corporate renewal and insolvency prevention, by returning troubled companies to profitability and financial stability.

Once a turnaround expert is engaged, they work on the following key areas:

Distress

Timing is critical when a company is underperforming. The turnaround specialist will quickly assess a company’s financial position and take steps to improve cash flow, stabilise operations, communicate with key stakeholders to re-build their support, explore all strategic options and develop a comprehensive turnaround strategy.

Cash Flow

This is crucial! The turnaround experts can work on implementing strategies to improve all areas of the cash flow cycle. In our experience a 10%-25% improvement in working capital is achievable.

Strategy

Strategic, financial and operational reviews are conducted to identify areas of underperformance and then the specialist will assist management with executing strategies to improve the overall performance of the business.

Capital

Turnaround specialists have an extensive network of financiers and private equity firms and are able to introduce the right combination of debt and/or equity to fund the business.

If this sort of expert is invited in early enough to work with troubled companies, better outcomes than insolvency can be achieved.

When is the right time to call for help?

There are always early warning signs that a business is in trouble, but quite often business owners and leaders are too immersed in the daily grind of the business to notice. The following is a list of the major warning signs that management teams (and their advisors) should be alert to:

  • Working capital growing faster than revenue

  • Difficulty in obtaining finance

  • Management “buying” sales at the expense of margin

  • Loss of a key customer

  • Increase in staff turnover

  • Increasing creditor pressure

  • Inability to pay tax and superannuation liabilities

  • Impending banking covenant breaches

  • General industry downturn or consolidation within the industry

The most common reasons businesses find themselves in trouble include fast growth, poor working capital management, bad management, lack of a clear strategy and loss of a major customer.

It is common for directors of troubled businesses to lament to me: “If only we had met your firm 12 months ago” or “we didn’t even know turnaround companies existed.”

Those companies that ride out the economic rough times that (in my view) lie ahead of us in the short-term future will be the ones that recognise the early warning signs — and aren’t afraid to ask for help in order to survive.

Michael Fingland is a director at Vantage Performance and has twelve years experience in the business performance management and corporate restructuring industries.

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