Often financial problems can be resolved without the need for a company to go into liquidation. When we meet with a client, we will consider their circumstances and explore with them all options which may be available. This can include:
Most of our clients would like to see their business saved and therefore want to explore the option of business turnaround. But what do these clients need to consider? And what factors are relevant?
Reasons for financial difficulty
Most businesses in financial difficulty have been making losses, resulting in the business incurring debt which is or is becoming, unmanageable. Occasionally there may be other contributing factors, such as employee fraud, unforeseen damage to stock or assets, changes in regulatory conditions or loss of key staff members. But the majority of the clients who are referred to us have loss-making businesses.
The first thing for a business owner to assess is what their break-even point is and how far away from their break-even point they are. Many business owners do not know the break-even point for their business and do not adequately focus on the key drivers of profitability.
A business’ break-even point is the point at which its revenue equals total costs or expenses. At this point there is no profit or loss – in other words, the business ‘breaks even’.
Knowing your break-even point and knowing how far away you are from it, is the first step in assessing whether you can turn your business around.
Can the business be improved to trade profitably?
Once a business’ break-even point is known, discussions can be had and analysis carried out regarding whether or not the business can break-even (and then make a profit) and what strategies can be put in place to achieve this. Options which may be available for a business include:
- Increasing revenue, either by increasing the volume of sales or increasing prices; and/or
- Reducing expenses, particularly larger expenses, such as wages, rent and financing costs; and/or
- Closing unprofitable parts of the business in an orderly manner.
If it is determined that the business can break-even (and then make a profit), then this may in itself not be enough and further questions must be asked:
- Will profits be sufficient to pay down existing debt in a manageable time?
- Can funding be sourced to meet or cover debt, while the business is being turned around?
- Can creditors be managed in the interim, perhaps by way of negotiating payment arrangements or extending trading terms?
What if the business cannot trade profitably OR profits are insufficient?
If the business cannot be turned around or if any future profits are going to be insufficient to pay down existing debt in a manageable time, then the options for the business owners include:
- Selling the company’s business on the open market or to a related entity on commercial terms with regard to be had not to enter into an illegal phoenix transaction; and/or
- Voluntary administration; or
Naturally, a business owner may not want to proceed with any of these options, but in some cases once an analysis of the business has been carried out, including the matters above, then there may be no other feasible solution and it can be better to be proactive in dealing with an insolvency process.
Contact us for advice and assistance
Any business turnaround engagement is not a simple project and it often involves a detailed analysis of the business and careful planning prior to taking any turnaround steps.
This is where we can help, so if you want to consider all options for your business and not just voluntary administration or liquidation, please contact Pearce & Heers at our Brisbane or Gold Coast offices for an initial obligation-free consultation.