Signs of trouble

Running your own business can be extremely rewarding and many entrepreneurs start a business fuelled with passion, courage, motivation, and a strong belief in their company, product and/or service. And, as a nation we encourage that entrepreneurial, number 8 wire, give-anything-a-go attitude.
But with every business, come inevitable challenges.
David Webb, managing partner at PPB Advisory New Zealand, says it’s important for SME owners to recognise the early warning signs of trouble and ensure their business prospers well into the future.  
“Most business owners will be aware of the classic warning signs,” says Webb. “Lack of cashflow or overdraft facility are common culprits, typically resulting in delayed payments to creditors and direct debits being bounced. Yet we often see business owners bury their head in the sand. They hope that things will improve and they can trade their way out of the situation.”
Conversely, when alarm bells start to ring, SME owners need to take swift and decisive action to increase their ability to turn their business around.
As well as dwindling funds, there are other signs that can alert business owners to potential trouble. Management quality, for example, is a major determinant of business success. In essence, that means management teams must be completely plugged into market conditions, their customers, their suppliers, and employees, in addition to their own financial performance.
“In our experience, most SME business owners can often spend too much time working in the business rather than working on the business. They’re distracted by the day-to-day operations and lose sight of the performance and strategic direction of the business,” says Webb.
To rectify this, business owners must take the time to stop and ensure that the business is achieving the results they anticipated and revisit the strategy to ensure it meets the needs of its customers.
“Overestimating the demand for a new product or service, or a lack of funds when a business starts to grow are examples of poor definition, or a lack of a sound business strategy. It’s important to have a clear long-term, big picture plan for your business to grow or sustain market share,” Webb adds.
Dwindling staff morale or loss of key personnel can also be an indicator that a business is in trouble, so when things are getting too much, it’s critical that business owners face up to the situation they’re in.
“Proactively engaging with relevant stakeholders such as management, employees, banks, IRD and trade suppliers will ensure everyone understands the situation and work towards the common goal of saving the business. In the worst case, this will also help with mitigating further losses and possible personal exposure of the debtors or guarantors.
“Seeking external advice can also help SME owners to ensure they’re taking the right steps,” says Webb.

Key partners
Every SME owner should have a trusted external accountant, lawyer or business advisor that can help them put together a detailed plan to aid with stabilising and recovering their business.
The next port of call should be their relationship manager at their bank.
“Your bank may be able to provide financial assistance if the precarious position is temporary. Alternatively they may be able to refer you to a turnaround expert if the situation appears to be a longer-term issue.
“The regional councils can also be a good source of information,” suggests Webb. “According to recently released Statistics New Zealand data, SMEs make up 99 percent of all New Zealand enterprises and account for more than half of the economy’s output. Accordingly, the Government is currently promoting SME business growth and owners may have access to partially funded business advisors through New Zealand Trade and Enterprise.
“We understand that SME business owners may initially be hesitant to seek assistance as they have invested so much in their businesses, both financially and emotionally. However, we find that once they do they are comforted to learn they can often be stabilised and turned around to a more sustainable footing,” says Webb.

Action points
There are some practical and immediate steps that SME owners can take for themselves.
“I can’t emphasise strongly enough the importance of a short to medium term cashflow forecast,” says Webb. “Once the warning signs have been identified, business owners should start to prepare such a forecast if they don’t already have one.”  
A cashflow forecast will provide the bank with assurance that the business has matters in hand and has a feasible plan for recovery. It will also allow SME owners to plan payments to creditors and hopefully agree repayment plans whilst maintaining ongoing trade.
It’s also important to engage with the IRD early. If a problem is brought to them with a solution, they’re more inclined to work with a business. If the SME owner does not engage with the IRD or takes a confrontational or aggressive approach, the IRD can become an aggressive creditor in recovering its debt.
In terms of timeframes for turnaround, it really depends on the circumstances.
“If the underlying business is solid and profitable and sales haven’t dropped, it may be able to manage a turnaround in a three to six month time frame. If there are problems with the underlying business, it may take six to 24 months to turn around the business while you target the problems or look to downsize. A significant period of good trading and cash inflows to repay creditor arrears are required if downsizing is pursued,” says Webb.
It is important that business owners maintain a positive attitude throughout the process and accept that they will have to seek external advice he says. They will have to listen to this advice and put it into action – or keep an open mind if they robustly challenge the advice but the advisor disagrees. It’s also vital to keep staff informed and motivated at all times.
Early detection of the warning signs and sustained effort, coupled with help from an advisor, will increase business owners’ chances for a turnaround exponentially.
“Ultimately they need to recognise that this is hopefully only a temporary blip and that it can be fixed,” concludes Webb.