Missed the warning signs? Now what?

Last month, PPB Advisory’s managing partner David Webb addressed some early warning signs that could signal business trouble for SME (small and medium enterprise) owners.

But what happens if you’ve missed some of those telltale signals? Can your business still survive? The good news, according to Webb, is that there are a number of options available to business owners who are experiencing difficulty.
There are numerous factors that will aid in dictating your course of action; however it’s important to identify the severity of your situation from the outset.
Identifying the level of creditor pressure that you’re experiencing is a good indication of how severe your situation is, and how best to respond.
Webb offers three possible scenarios and the best course of action.

1. When creditor pressure is low
You’ve identified some issues, or you may be noticing a few more phone calls from suppliers, but thankfully your business relationships are still intact, you have the ability to manage your stakeholders, employee morale is still high and you’re up to date with your payments to the IRD.
Webb says that in order to turn your business around in this scenario, it is important that business owners direct their time and money towards specific areas of focus.
According to the New Zealand Institute of Economic Research’s (NZIER) review of MYOB’s Business Monitor research data between 2009 and 2012, SMEs can learn some key lessons in business rebuilding strategy from the global financial crisis. Surprisingly, the traditional cost-cutting and margin-increasing measures aren’t top of the list.
The report suggests that SME owners should focus first on growing market share. This should be achieved through a combination of customer acquisition and retention.
“It’s important to take on your competitors at every opportunity and drive market share. Maintaining margins on existing business is crucial, and if this is achieved, then any new business will ultimately contribute to the bottom line. This may mean decreasing your margin on new business in the short term, which can be re-addressed in the future when you have proven your worth to the customer,” says Webb.
Keeping your current customers happy, and not looking elsewhere, is just as important. This can be done through relationship building activities, ensuring impeccable service or through special price offers.
“While this may reduce your margin in the short-term, it’s an important strategy to ensuring the revenue is retained long-term,” says Webb.
Another key focus should be consistent investment in marketing.
“Often, when things get tough, marketing is the first thing to go,” says Webb. “Instead, business owners should be looking for more effective ways of marketing for a better return on investment.”
Online marketing channels, such as social media or website banners, can enable businesses to be more targeted with their advertising in a more cost effective way than traditional advertising.
Next on the priority list is continued investment in your front-line sales staff, ensuring that they are motivated and enabled to do their jobs. Staff retention and investment in human capital will ensure you keep a competitive advantage when things are tough. Also, ensuring all staff are kept up to date on any changes affecting them, will help with gaining their buy-in from the outset.
“Having effective IT systems such as a successful website and processes for financial reporting, ordering and logistics are also key to business success,” says Webb.
He emphasises the importance of business owners taking a step back from day-to-day operations and focusing on the business’s strategic direction.
“Stop working in the business and start working on the business,” he says. “Redefine your business strategy so you have a clear, long-term plan for building market share and turning your business around.”
Naturally, a business owner needs good support and advice through a process like this. PPB Advisory recommends working closely with a trusted external accountant, lawyer or business advisor that can consult on the recovery process.
Above all, make yourself accountable to… yourself. A business plan and cashflow forecast, which details cash in and out, will help to manage payments and allocate funds in a sustainable manner. It will also demonstrate to your bank that you have your business matters in hand and a feasible plan for recovery.

2. When creditor pressure is high
In this scenario, your cashflow is under pressure from creditors claiming their money – often aggressively. But there is hope. PPB Advisory suggests that there are two viable routes to solvency, depending on the circumstances.
A. Payment Plan or Creditor Compromise
This route is the best solution for an SME owner who has had a big project turn sour, or has a large, one-off liability but has a core business that is operating solidly.
A Payment Plan is an informal agreement with some, or all, of your creditors over a period of time.
A Creditor Compromise is a more formal approach to rectifying cashflow problems with the compromise agreement documented and agreed to by the majority of creditors.
“A Creditor Compromise is essentially a proposal to repay your debt at a certain number of cents in every dollar, over an extended period of time,” says Webb. “This is a good solution from the debtor’s perspective, as it allows for continued trading. It also means that the creditor is still able to recoup some funds if they accept the proposal.”

B. Voluntary Administration
This is a mechanism for companies in financial distress to obtain some breathing space from creditors, while still trading and keeping employee contracts and supplier agreements in place. When a company is, or is likely to become, insolvent, a Voluntary Administration (VA) is the best chance for survival.
Webb says that an SME owner should enter into a VA if they have done everything they can to turn the business around, to no avail.
“Once an administrator has been appointed, they’re in control of the company’s business, property and other affairs. It’s their job to delve into the business, understand the different options available to remedy the situation and then work with creditors to agree the future of the company,” says Webb.
There are three possible outcomes:
• The company is returned to the control of its owner/directors if it is no longer insolvent.
• A Deed of Company Agreement is executed to rehabilitate the company under the supervision of the administrator.
• A liquidator is appointed.

3. When you’ve reached the point of no return
Liquidation is a tough path to go down and is most likely to occur only if creditor pressure has become too difficult to manage and there is no way to trade out of the situation.
The liquidator can be appointed by the creditors (compulsory) or the directors (voluntary). They will then come in to review all the assets of the business and sell all that is of value.
Unfortunately at this stage all employee contracts, lease agreements and client contracts are terminated, and if a new owner is established all of these need to be renegotiated.
In short, a liquidation effectively signals the end of the life of a company, so it’s important to be aware of the warning signs to avoid this.

Key things to remember
Webb points out that there are many ways to solve a problem. “That is part of the excitement and satisfaction about business – creating solutions to the roadblocks we come up against.
“Don’t be scared to step outside your business and look at it with a new perspective. It’s vital, especially when the chips are down. This will help ensure you are not missing any weak areas and can more effectively address problems that you previously may have been oblivious to.”

Top 5 investments when rebuilding your business:
1. Customer acquisition
2. Customer retention
3. Online marketing
4. Sales (offline)
5. IT investment