NEWS & INSIGHTS

Diversions: I’ve had it for ages doctor but its started changing colour!

SYMPTOMS OF FAILURE ARE IDENTIFIABLE, CAUSES ARE CONTROLLABLE

When analysing businesses, we look in hindsight at why businesses fail. In doing so, we often confuse the causes, with the symptoms we should see. Causes are generally controllable, or preventable, symptoms are not, but they are identifiable, and early identification means early treatment.

The symptoms of the common cold are a runny nose and sore throat. But by then it is too late, you are sick. The causes of a cold are (a) questionable hygiene and (b) not wearing shoes in cold weather. These actions are treatable, and so colds can be restricted.

SYMPTOMS VS CAUSES OF DECLINE

Corporate decline is the same. Symptoms are tell-tale signs, danger signals that can be identified. What symptoms you see depends on your point of view and the information available to you. Those closest to the business generally see the problems before outsiders. However, sometimes they don’t have a trained eye. Often those with the most at stake (shareholders) rely on publicly available data only and suffer from information time lag. Set out below are some of the things that different observers see:

Observer	Symptoms
“Interested observer/ reader”	High profile takeover bid * Stunningly poor results and loss of CEO * Equity raise following challenging results or incident * Public reaction to major disaster * Obsolete or hopeless products
Investor	Suspensions from trading suggesting a strategy change or solvency concern * Changes in shareholdings of directors * Rapid Management turnover suggesting disharmony * Unsuccessful equity raising not meeting predetermined targets suggesting a lack of market confidence in stated business strategy * Failed acquisitions
Analyst	Rapid changes in direction and strategy * Inability to properly fund current strategic direction * Lack of investment in new technology impacting on competitiveness * Lack of sufficient funds for capital investment * Big Projects’ designed to change the overall business dynamic – heavy reliance on untested, unfunded strategy * Loss of Customers and contracts * Discussion of financial issues in the media * Delays in publishing accounts and qualifications
Financial Controller	Creative accounting practices to create profits, management ‘window dressing’ * Poor relationship with borrowers – Breach of banking covenants, inability to obtain short term extensions, lack of communication with lenders * Statutory payments outstanding – ‘borrowing’ off government agencies * Pending and unresolved litigation * Organisational inertia – Inability to address key strategic threats suggesting management are unable/unwilling to make decisions * Delay in/inadequate Financial Statements * Frequent, unscheduled Board Meetings * Poor working capital management * Creditors outside terms, special repayment arrangements * Lack of budgetary process and integrated forecast * Analysis paralysis – No sense of urgency
Suppliers and customers	* Worsening terms of trade, special payments to resume supply * Invoice factoring * Raising credit notes after year end * Problems with IT Systems * Post-dated cheques and considerable * Low staff morale * Declining service
Employees	* Major management issues can often only be seen by staff * Emergency Board Meetings * Management paralysis * Functional isolation

THE TREATMENT AND THE CURE

Businesses are not people; they have stakeholders who have to take responsibility for improvement. Sometimes, to repair confidence so as to establish stakeholder support, it assists to treat the symptom. But if you are observing too many of these symptoms, then it is too late. The secret is to try and recognise the trends leading to the crisis and not the crisis itself. Conversely, pandemics can’t be stopped, but you can ready your business with a risk management plan, plenty of capital, and appropriate gearing.

You really need to find out the root causes of a problem, in order to re-establish business confidence. In a later article we will look at the causes of decline, and how early intervention can address those causes.

This is a particularly important question in the context of Safe Harbour - where directors are required to form a view on insolvency based on a suspicion – as we covered in our Recent Article