Businesses in distress - Conclusion
By Christopher Ram
Stabroek News
September 5, 1999
Introduction
In Business Page last week we looked at some of the symptoms of distressed businesses, an ever increasing group in Guyana's commercial life. Today, we look at the problems which are common to distressed businesses. Naturally these problems may not all exist in the same entity or at the same time or to the same degree. Depending on the seriousness of any single problem, e.g. deficient management or financial controls, a business can collapse as a result of that one problem.
This article draws heavily from Stuart Slatter's Corporate Recovery - A Guide to Turn-Around Management. In his research of forty (40) United Kingdom companies which were experiencing problems, Slatter identified "eleven frequently occurring factors which are the principal causes of corporate decline".
Here they are:-
1. Poor Management:
This is perhaps the most common cause of business failure. Bad Management of course can usually be traced to almost any business failure. Even where an "act of God" may cause serious if not fatal failure management may be held responsible for not taking adequate precautions including insurance. The several areas of management which can lead to business failure are:
a) One man rule characterised by an autocratic leader who is so confident of his own ability and approach that he neither listens to those around him nor recognises the change that is taking place. Strong leadership is of course not necessarily a bad thing and indeed the strong, high profile leader is often glorified when things succeed but is equally readily crucified when things go wrong.
b) Combined role of the chairman and chief executive: in this situation there is no effective supervision of the chief executive which may be so critical to the interest of shareholders.
c) Ineffective board of directors failing in their primary responsibility for planning, resource allocation and control decisions. This in turn may be the result of weak non-executive directors, a board dominated by one type of interest or one that meets too infrequently or seek colleagiality and consensus rather than decisions that are crucial to the business.
d) Diversion of critical resources - technical, financial, managerial - from core to peripheral activities. Businesses should never starve their principal activity even in the search for new products and services. At best, new activities should seek to supplement not substitute for the real business.
e) Lack of management depth - too often the CEO is too visionary and advanced for his subordinates. Companies in distress often experience a drain of senior, more able managers leaving a huge gap between the top and the rest of the team.
f) Inadequate structures, the absence of a strategic focus and the absence of control featurel often themselves contribute to business failures.
2. Absence of Controls:
The absence of adequate financial controls including budgetary control, costing systems, working capital management, timely and reliable financial and management accounting information may also lead to business failure. Far too many businesses in Guyana rely on the arrival of the auditor after the year end to tell them what their profit or cash resources are. This type of financial information is often out of date, too aggregated to be useful and not in a form that lend itself to analysis or decision making.
Slatter identifies poorly designed accounting systems, failure to use such available information, organisation structure not conducive to decision making and poor costing systems as some of the problems confronting even those businesses which do have controls present.
3 Competition:
Competition as a source of business decline may come either in the form of price or product competition. A business that fails to understand the concept of product life-cycle, believes that its product is still the best on offer or does not do research into product renewal or replacement is encouraging product competition. In matter of price, globalisation means the company has to compete with the best in the world. Few products are price insensitive whilst the structure and size of the market often determine the depth and severity of price competition. To succeed a business must offer a product or service which is competitive in quality and offers real value for money.
Of course some competition may be inherently unfair as where one's competitor enjoys concessions which allow it to charge a lower price.
4 Cost Structuring:
Cost structuring may also cause a business to suffer since the market is unwilling to subsidise high cost, inefficient operators. In manufacturing in particular, the word excellence simply means lean structures and unavoidable costs. Cost also has to do with the scale of operations. Higher volumes translate into lower unit
cost and greater profits.
There must be very few companies where cost reductions are not possible particularly in large successful entities where management styles and culture and operating systems exist with insufficient attention to cost.
5 Changes in Market Demand:
Many businesses fail to detect and respond to a reduction in the demand for the product and service it offers. Management needs to recognise and distinguish between the seasonal decline, the least serious of the three, cyclical decline due to changes in demand reflecting the business cycle (expansion, contraction, etc.) and a secular decline which 'is part of a long-term trend.
Since business is all about the sale of product and services a successful business will make sure that it has on offer or in the pipe line products/services at various stages of their life cycles.
6 Adverse Movement in Commodity Prices:
As an essentially commodity producing country, Guyana is painfully aware of the impact of falling prices for producers. Even well managed gold mining operations may find that neither the most sophisticated hedging techniques nor manufacturing excellence will be enough to counter sustained falling prices.
7 Lack of Marketing:
A poorly motivated sales force, ineffective and wasted advertising and failure to focus on key customers and products inevitably result in falling sales and profits with implication for long term survival. Some marketing problems may be purely operational whilst others are of a more serious, strategic nature.
Whatever they are, it is really of a managerial nature, crucial to the firm's survival.
8 Big Projects:
Whilst this is often more associated with the public rather than the private sector many businesses have failed because they chose "big projects" and revolutionary strategies. Some of the problems associated with the big projects include time and cost over-runs, poor cost estimation, late design changes and contractor disputes
all of which may pose serious cash flow difficulties for existing operations as well.
9 Acquisitions:
Though not very common in Guyana, acquisitions and mergers are part of the daily fare of business life in the more developed countries. The evidence suggests however that companies which make acquisitions that do not fit into their operating mould, corporate culture or the personal styles of the key people can suffer serious decline depending on the sums involved and the type of acquisition.
10 Financial Policy:
Many businesses pursue financial policies on a do-it-yourself basis. More often than not the consequences are costly for the business perhaps because of:
* A high debt to equity ratio with operating profits going to service debts.
* Over conservative financial policies where there is little re-investment
* Over-aggressive policies leading to cash flow difficulties
* A poor choice of financing sources.
Prudence needs to be the underlying philosophy of any business with policies that
are sensible, flexible and appropriate.
11 Overtrading:
Too often start up companies appear to be doing extremely well with exponential sales growth outstripping the competition and masking underlying difficulties. A policy of sales growth regardless ofprofitability often means reduced margins and sales to marginal and risky customers merely to boost turnover.
Soon however with cash tied up in receivables and the little profit from sales financing bad debts the business falls like a pack of cards with the creditors left to pick up the pieces.
Conclusion
At almost some stage or another even the best run business encounters one of the problems identified above. Risks of failure are a part of business and the successful operator is the one who is prepared for and deals with both the internal and external causes of the failure. Business mortality rates are very high. Good management focussing on strategic planning, resource allocation, operational efficiency, enlightened human resource practices, proper financial and operational controls, responsiveness to change and visionary leadership however are almost certain to secure survival and prosperity.
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