FAQs on Business Turnaround
In our FAQ centre, we’ve provided information on the most common questions clients ask us when facing issues to help turn their business around through difficult periods of trading. Please visit the area of interest from the list below.
If you would like to discuss any subject in more detail, please do not hesitate to contact Malcolm Coomber on 020 8652 2450 or email firstname.lastname@example.org
How do organisations manage to get in a mess?
Every product and service has a finite life cycle and even when things are going well in the business, you can never be confident that the future and your investment in it will perform as well. Also it is well known that a corporate structure influences a business’s efficiency, performance and profitability and this structure will either hold a business back from performing or catapult it profitably into the future.
Companies can get into a mess through:
Is my business in a healthy financial state?
It is essential that a company has readily available assets that the business can use in its day to day operations, without which the liquidity risk is increased and financing payment of resources, employees and creditors becomes more onerous. So whilst profitability is obviously important it is essential that creditors get paid. Therefore it is critical to review stockholding, accounts receivable and accounts payable.
The Current Ratio (i.e. current assets / current liabilities) indicates how easily payments to short term creditors can be met from readily convertible assets (stocks, accounts receivable, cash). If the ratio is less than one (worsened if you exclude stockholding, either because it is not readily convertible or it is not relevant to the company – called the Quick Ratio), a problem may well already exist.
The Capital gearing ratio (i.e. long term debt / total capital) compares the amount of owner’s equity (or capital) to borrowed funds. Understandably, a company with a high ratio is more vulnerable to a downturn in the business cycle, having to meet its interest payments out of lower sales and reduced profits, whilst also reducing dividend payments to shareholders. A low ratio is seen as a measure of financial strength and stability.
The debt:equity ratio (i.e. total liabilities / shareholders’ equity) indicates what proportion of equity and debt the company is using to finance its assets. Although this ratio is dependent upon the industry in which the company operates, a high debt/equity ratio usually means that the company has been aggressive in financing its growth with debt. As a general rule capital-intensive industries, e.g. car manufacturing, may have a ratio above 2, whilst an SME may have a ratio of under 0.5.
Lastly, is the interest cover ratio (i.e. EBIT / interest charges) and it shows how easily a company can pay its interest on outstanding debt. Therefore, the lower the ‘interest gearing’ ratio, the more the company is burdened by debt and the interest. A ratio of 1.5 is marginal for normal trading and below 1 indicates that the company is not generating sufficient revenues to satisfy interest charges.
Is debt finance a good thing?
Almost every business will borrow money at some stage and raising these funds can be challenging even in a good economy but it gets more difficult when the economy has a downturn. The key issue is to retain the confidence of your existing financier(s), normally your bankers, whilst doing the same for your shareholders, under varying economic conditions, seasonal cycles and investment in capital projects.
Each bank will lend against their own lending criteria, not the company’s (or indeed any potential private equity investor). The bank will track the various underlying conditions and continually assess its position. It will be difficult to persuade an existing bank manager to continue to support the business if it is currently in a poor financial position. However the bank may advance new money to allow the business to affect a new recovery plan, thereby reducing the bank’s overall exposure, if the bank can see a cohesive and doable recovery strategy. If the existing bank is not happy with the recovery strategy, then it may ask the company to take its banking elsewhere.
Remember, banks set out covenants and also generally like an interest cover of about 3 times or more, although one should look at other companies operating within the same industry to get a sensible comparison. A bank can insist on an independent business review, usually undertaken by one of the major accounting practices, if it feels that its interest repayments are in jeopardy. The cost of such a review is borne by the company, not the bank!
Why work with Clarkson Hyde?
We limit the number of businesses we work with, which means that we dedicate the time and resources necessary to get you the best result.
You will always know what is happening as you will deal directly with the person responsible and accountable for doing the work for you.
We will gauge the situation as quickly as possible and provide you with our analysis of your recovery prospects.