Business Turnaround is essential for economic growth – especially due to the COVID19 crisis. You might not have supersonic hearing, but as an accountant you are the closest thing to Superman that your clients are going to get. You might be the one person who can save a family business from insolvency. The key to unlocking your super powers is understanding what to look for, and then how to address problems when you spot them.
Since the Coronavirus crisis, it’s become more important than ever that you don your cape and prepare to help family businesses in need.
Since March 2020, personal liability for directors from insolvent trading has been temporarily lifted (the COVID19 Safe Harbour). However, when this expires in September and the stimulus packages have been exhausted, many family businesses are going to need urgent assistance. The superannuation amnesty ends in August too – this means the perfect storm could be brewing…
Family Businesses often Leave Things too Late
This is why it’s so important for you to act early. The faster you take action, the more likely you are to stop the enemy from taking over the city. As an accountant, you are already aware that owners of SMEs too often leave it too late before seeking help. Business owners are too busy on the tools, in chasing new business, and putting out small fires, to put their minds to longer term financial matters. Many clients’ admit to not being financially literate, and may not understand the seriousness of their financial position.
Additionally, some directors may believe that they’ll negatively impact their reputations, or the confidence of their customers, if they ask for help.
There are many reasons why insolvency raises its ugly head. They include:
- losing customers, especially key accounts
- inability to get paid on time and manage credit or debt collection
- emerging competitors
- growing too quickly
- growing beyond the company founders’ own knowledge
- being forced to close for reasons outside their control (viruses, floods, fires, drought, illnesses, or other so-called “acts of God”).
How can you know if a business is at risk of insolvency?
There are a number of red flags for insolvency. Here are two major contributing factors.
1. Focusing on the wrong thing
When a company’s management sees a financial disaster on the horizon, it can sometimes focus on that disaster to the exclusion of all else. In this situation, a company’s leadership can become too distracted to act effectively. Unfortunately, it pretty much guarantees that insolvency is just around the corner.
2. Cashflow becomes a crisis issue
In the beginning, it might just be that your clients miss their targets. But then their accounts payable days stretch out from 30 days to 90 days. Then they stop paying their tax or superannuation liabilities. It’s a slippery slope from here to complete demise.
The drop from distress falls quickly into crisis. At this point, if the crisis is not properly handled, insolvency is the likely result.
Here’s what you can do to save a business from the perils of insolvency
Saving a business starts with an honest conversation. As an accountant, it’s up to you to pick up warning signs (see our indicators of insolvency), and to open up a safe space in which a business owner can air his or her issues. If after having a conversation you’re not sure whether you can help them, talk to a specialist in Safe Harbour and business turnaround (see our safe harbour definition here). This is the best way to understand the complexities of the insolvency framework, and what has to happen, especially if the solution is to restructure the business.
Note that it may be hard for you to do this if you only talk to your clients once a year. It’s incumbent on you to forge close and meaningful relationships. It’s the only way you can rescue them at the first sign of trouble!
As an accountant, you are your clients’ most trusted advisor. Make sure that you are giving them the best chance possible.
To consider a business turnaround, you need to:
1. Consider seriously whether the enterprise is worth saving.
2. Look for the root cause of the problem. Are you able to help them fix it?
3. Seek advice from a business turnaround practitioner. Then, weigh up all of the options available to you whilst using Safe Harbour.
4. If restructuring is the only solution, find out whether the business’s major stakeholders will support it.
5. Create a turnaround plan and begin putting it into action… but keep a close eye on it while you do.
6. Communicate, communicate, communicate.
Why is it so important to get stakeholder support?
In order to turnaround any business, you must consider restructuring (formal or informal). The problem with a formal restructuring is that even a small voluntary administration costs an average of $97,000 (!) and the stigma attached basically means they do not work for family businesses (see the study by Mark Welland 2014). It’s much better for directors to retain control of their business and develop their own restructuring and turnaround strategies.
When your major stakeholders are banks, financiers, suppliers, employees, and landlords, one disagreement can derail the entire process. Have open conversations with all stakeholders early in the piece. This way you will know whether or not your plan is viable. And if it isn’t, you will know to go back to the drawing board.
When threat of insolvency looms, good communication is key
There can sometimes be a lot of people to communicate with when a company is in distress. Depending on the industry, there can also be numerous contractors and subcontractors. Remember, too, it’s a financial matter. When money is the issue, people’s emotions can be intense. When directors are under scrutiny, a business failure can affect them personally: They may stand to lose their homes or other assets.
And when you’re in a stressed state, you make bad decisions. If your client decides to take matters into their own hands, there is a risk of illegal phoenix activity – something that accountants can be held liable for if they have inadvertently aided. This is where you need the advice of a specialist turnaround expert who has the qualifications, experience and professional indemnity to provide safe harbour advice (TurnAbout AU is an ‘appropriately qualified entity‘ under section 588GA of the Corporations Act – see our Safe Harbour definition).
You are the one person who can help them to understand what is legitimate advice, and what is not. By guiding them, you protect yourself as well as your clients.
This is why I offer free consultations
Being able to turn businesses around and set them up to win is one of the best feelings in the world. The key is doing it correctly from the start so you can give your clients clear, appropriate advice. You can book a free consultation with me to get a high-level view of what your clients’ options are.
Our turnaround and restructuring practitioners are headquartered in Adelaide, SA. However, with COVID19 we too have embraced the virtual world and now offer free online consultations nationwide.
The faster you get good advice, the faster you can restore your client’s family business to a sustainable business model. We are always happy to ‘shoot the breeze’ with accountants on the topic of business turnaround.