As a turnaround specialist and insolvency practitioner, I frequently engage with businesses, financiers, banks, law firms, and accounting firms to highlight the critical importance of recognising and responding to early warning signs of distress. In today’s volatile economic landscape, understanding these signs and implementing effective strategies is vital for sustaining business viability over the next 12 months.
Cash Flow: The Lifeblood of Business
At the heart of financial health is cash flow—often heralded as “king.” Many businesses overlook the necessity of maintaining robust liquidity, leaving them vulnerable when faced with unforeseen challenges. One fundamental tool every business should employ is a 13-week daily cash flow forecast. This simple yet powerful tool allows businesses to manage their cash flow proactively, preparing for seasonal fluctuations and unexpected expenses. When I am engaged on a Turnaround assignment, this is one of the first tools Fixity will implement in a business to provide an overview of the short-term peaks and troughs (ahead of time). This allows business owners to be proactive as opposed to reactive.
Yet, cash collection is just as critical as generating sales. I see businesses focusing on driving revenue growth, but internal processes for debtor collections are either not followed or do not exist. Businesses must not only focus on selling their products or services but also ensure they have efficient processes in place for collecting payments. Poor cash collection practices can quickly lead to bad practices resulting in liquidity challenges, to keep the business afloat. Because of poor cash collection processes, I regularly see the non-payment of creditors to fund working capital, which worsens their creditor position and potentially puts Directors at risk of breaching Directors Duties under the Companies Act 1993.
People Matter
While financial metrics are crucial, the human element is equally vital. In my experience, having the right people in key positions can make or break a turnaround of a stressed business. Struggling businesses often find themselves under-resourced, especially in their finance functions or key technical areas. This is creating significant challenges. Burnout among finance teams can lead to lack of engagement, inaccuracies in financial reporting and hinder effective decision-making.
I am often engaged on Turnaround assignments with businesses where there is a sole Director who may not have strong financial acumen. Part of my role is to triage the immediate cash flow issues, but to also ensure the Director has the right people around them to support them driving a successful business going forward. This may result in the recommendation to hire or exit staff and/or bring in an independent virtual CFOs to oversee the financial operations on a monthly basis and act as a sounding board for the Director.
Investing in training, support, and adequate staffing is essential to ensure that your team can meet the demands of a distressed environment. If you do not have this capability you should seek independent advice early.
Operational Fundamentals: Back to Basics
Operational inefficiencies can exacerbate liquidity issues. Many businesses become relaxed in their processes, failing to implement basic fundamentals that can help stabilise their business. I often find that there can be a disconnect between the people doing the work and the leadership team, resulting in not fully understanding what the problems are. If you speak to the staff on the floor, you will find they will highlight a number of issues that are more often than not having a direct result on cash flow for the business. Some of these fixes can be simple in nature and can have a detrimental effect on a business if not fixed.
A rigorous review of internal processes can reveal critical areas for improvement, ensuring that operations are lean and effective and have a fundamental focus on liquidity.
Family Run Businesses: Unique Challenges
Family-run businesses present their own set of challenges. Emotional ties can cloud judgment, making it difficult to recognise when external support is needed. Establishing a network of trusted advisors—whether turnaround specialist, accountant or legal advisors—can provide invaluable perspective and guidance.
In almost every case, Family business value loyalty as one of their top values, and loyalty is often prioritised over skillset, which often leads to under resourced key functions (finance function and technical roles) which directly impact liquidity. I am seeing an increase in the number of disputes with family businesses where individuals are looking to exit the business, but they cannot agree on how to do that. Resulting in business owners having a split focus on driving business growth and trying to resolve the family dispute, often leading to deterioration in business performance and potential legal actions. Getting independent advice early to assist in negotiating an outcome can save businesses time and money and ensure they can be focused on driving business growth.
In conclusion, the path to recovery for struggling businesses lies in knowing what to look for and management taking proactive steps to fix or mitigate risks. By emphasising cash flow, investing in the right people, streamlining operations, and seeking external support, when necessary, businesses can navigate the challenges ahead. Recognising early warning signs and acting quickly can make all the difference in achieving a successful turnaround and a business that will continue trading in the long term.
