There has been a string of company collapses and failures over the past 12 months, with all statistics indicating it is more than 30% worse than the same time a year ago. In most cases the collapse comes about because the company has more debt than it can handle and a drop in sales have finally taken it’s toll.
The latest small business to collapse has been a kitchen manufacturer/retailer based in Queensland, with stores in all Eastern states:
One of the directors of the Business Recovery Division at HLB Mann Judd has said that the cause for the collapse was a combination of factors, including “…a downturn in trade from the general economic conditions, warehouses were massively affected by the floods particularly in Queensland and it needs a restructure”.
The key point that caught my eye in this case was that “the business needed a restructure”!
This often suggests that the business was bleeding money in one area and other profit-making parts of the business were keeping it afloat. Then along comes one or two more unplanned events (floods and downturn in sales) and whammo - the business buckles under the weight of “empty bank accounts”.
The need for a business restructure rarely crops up overnight - it develops that way. Business conditions gradually change in one market compared to another, another state or product range fails to make budget, stock levels creep up, customers take longer to pay bills and before you know the business has no cash.
As soon as the next crisis, natural disaster or economic downturn happens the business can no longer pay it’s debts and then major creditors (usually a bank or the ATO) step in and take control.
The sad part of this story is this circumstance can usually be avoided with one simple management discipline - reviewing decent financial and management reports and asking the right questions.
So many clients often think they know the business but after some detailed analysis of sales and profits they find out things that need addressing or sometimes suggest a change in strategy.
A client recently discovered one division routinely performed at a 40% operating profit margin whilst the other division in the business made a loss. In this case the business switched strategies and acted on some systemic issues that affected the loss-making division.
In some cases I have found business owners don’t even review regular reports other than check the bank balance and call outstanding debtors.
It is usually these businesses that will fall over when finally one more unplanned event tips the scales against them.
So ask yourself three simple questions:
- Do you have the funds to pay debts if they were called in?
- Given the cash flow you know will happen over the next 4 weeks, can you still meet your obligations?
- If you lost 15% of sales could you still operate and what would you need to change to keep going?
If you answer no to at least two of these questions then you need to seek some advice - and quickly - before the next flood, fire or economic downturn.