In this insightful article we spoke with Raj Nair, the principal of Solvent Advisory Services a boutique advisory firm that specialises in business restructuring and turnaround on what small businesses can do to effectively meet the challenges and survive in an increasingly complex and difficult business environment.
■ What are the typical issues that companies often run into that threaten their existence? (You can specify 3 or 5 top areas)
The biggest threat to businesses is poor strategic management, often in the form failing to keep abreast of changes in the industry and adapting Business practices. Rapidly evolving technological advancement these days have meant that the business environment and business models (which at one point may been considered full proof), are being disrupted and being made redundant sooner.The threats to business can also be further exacerbated by structural changes in the economy which are country specific (e.g., moving from manufacturing towards service-based economy). As small businesses, typically sit on the cusp and often subordinate to their larger counterparts, the need for long term, sustainability, and responsible practices among medium to large corporations is imperative. The ramifications of not doing so can have far reaching consequences.
Other threats to among small businesses include, poor financial controls and management, excessive borrowings and/or high cash use, large amount of bad /uncollectable debts, over-reliance on a particular good, service or customer, management dispute, and misconduct by officers which seem to have seen an increase of late, to name a few others. There are also of course, factorsbeyond the control of the business (e.g., extraordinary events like Covid) but these tend to be few and far between.
■ For each of these areas, how could they have prevented them?
Larger corporates are largely able to mitigate these risks but ensuring that their boards are sufficiently constituted with individual with diverse background and experience. It is also imperative that the board picks the management and executive team carefully, ensuring that they not only have the expertise to deliver on what is required but are able to align with the organisation’s goals, culture, and ethos.
Small businesses unfortunately do not have the same resources that large businesses do and tend to be limited in terms of what they are able to do. However, that is not to say, nothing needs to bedone. Having robust internal controls, policies and procedures is still a must and goes a long waytowards assisting the business minimise the associated risks. With the advent of newertechnologies, the costs of implementing such systems are no longer as prohibitive as they used to be in the past. In fact, technology has made the cost of doing business cheaper by making it quicker and more efficient. While there may be some short-term pain and inconvenience upon initial adoption, the payoff to the businesses in the long term will, more often than not, be higher.
Small business owners should also make it a point, wherever possible, to try to keep themselves regularly informed of any key changes in the industry, their competitors, and the market mix, and critically analyse their business model and operations to determine if it still remains viable or if therewill be a need to make incremental adjustments / changes to better meet the needs of the market.
■ Highlight easily addressable but common issues that could have been prevented through a little bit of attention to details.
Problems for businesses often arise, not from the lack of attention to detail, but rather, from the lackdirection and planning, complacency among senior management and un/ill informed decisions that often follow.
In the case of small business start-ups, the owner-operator often wears multiple hats in order to conserve funds and/or limit expenditure. As the business grows, the owner begins to struggle under the weight of these responsibilities and trying to juggle them all. For the lack of anyconsidered action, this then results in things getting missed and/or overlooked which becomes symptomatic of the business itself. Ensuring that a business is sufficiently resourced for growth is as critical as the growth itself.
For established businesses, complacency among management is often a root cause as well. A les-e-faire approach of “we have always done it this way and it has worked for us” usually leads to undesirable outcomes, particularly where a business first starts experiencing difficulties. Early intervention, seeking the assistance of a qualified restructuring professional and if necessary, legal advice, at the first sign of difficulties, is nearly always recommended in order that the underlying issues do not become endemic, and management can better inform themselves as to the options there are available to them, including, how to save the business.
■ What are some best practices in ensuring financial health of a company?
- Ensuring sufficient cash flow is maintained
- Proper management of receivables, bad debts
- Monitoring debt levels, liquidity
- Maintaining proper records
- Preparing budgets and forecasts
- Holding monthly management meetings to assess performance and if it was in line with budgets and forecasts. If not, understanding why and taking the necessary steps to have it rectified.
- Taking action at the first sign of financial difficulties. More often than not, leaving it till too late, will mean the only option available is to place the business into some form of external administration,which will be more costly.
■ What are the repercussions for the business of getting into an issue such as being liquidated or being declared bankrupt. (If the company is declared bankrupt, the owner can just start another company, right? That’s the benefit of a PTE LTD, isn’t it?)
Liquidator will take control of the business and proceed to realise all available assets for the benefit of creditors.
Liquidator will also investigate the affairs of the company to identify any potential claims that may exist, be it against the directors, related parties or at times individual creditors that may have benefitted unfairly at the expense of the general body of creditors.
Default / liquidation may be recorded against the director’s profile in their credit report(depending on reporting agency), making it more difficult for them to borrow, assuming they start up a new company post liquidation.
Potential to be disqualified from holding directorships for a period up to seven years.
A distinction has to be drawn between the usage of term bankrupt and liquidation. Unlike the US,the terms mean different things in common law countries like Australia and Singapore. Bankruptcy is a term used for individual persons while liquidation is used for corporate entities, like companies and associated entities.
In the case of being made a bankrupt (for example as a sole traded), this will be recorded by the credit agency. There is also a permanent record of bankrupts maintained, which would usually mean, in addition to restrictions imposed under the relevant laws on bankrupts during the period of bankruptcy, where they are not allowed to obtain any credit / allowed limited amount (depending on the respective jurisdiction), it would in general, be difficult for a bankrupt to obtain credit, post discharge as well making it challenging to re-start a business.
■ What advice would you give to a company in terms of increasing both its bottom line and top line? Any best practices?
Best practices are one that a company develops that is unique to its business and how it is operated. There is no one size fits all. Best practices should also not be fixed and should be evolving to suit thecircumstances, for example the adoption of technology. Increasing the bottom and top line is what most businesses hope to achieve, however a lot of it would depend on the business model itself and how adaptable it is to new opportunities in the market. All businesses go through the business cycle, and it will, short of a successful restructure, will eventually reach a state of decline.
Liquidations and other forms of external administration are therefore essential in reallocating capital, reducing inefficiencies and distortions in the market, and perform an important public function in putting an end and / or drawing a line in sand for businesses that have reached the end of its useful life. There is perhaps a need for existing laws to better align with these realities in order to make the system more efficient.
■ How should a business owner prioritise his time in terms of which areas he gives focus to—what are some common mistakes that business owners should know but don’t pay attention to?
Common mistake, particularly among SMB / SME owners is that they try to do everything on their own, which would be understandable from a cost perspective, when the business is in its infancy. However, what a lot of business owners tend to do is to continue to do what they did initially, even after the business is established. This usually means there is less time available to them to do what is need, namely, managing the business. These days there are no lack of tools available for a smallbusiness owner to be able to assist them in focus on what is most necessary. It is simply a case of adoption and making what may initially appear to be, uncomfortable adjustments.
The other common mistake is not being across the company’s financial position and/or putting off management meetings to enable this to be considered in order that informed decisions can be madeabout the company, where necessary. The owners, who are typically the directors of the SME/SMB will usually also have a limited appreciation of what constitutes their duties under the law, which would then have a bearing on their decision- making process.
■ Highlight a couple of case studies where you’ve helped to turn the business around.
Refer to case studies (below) on restructuring and insolvency assignment carried out.
■ What does company restructuring actually mean? Perhaps he can cover that too.
There are two ways by which a company restructure can be achieved, formally and informally. A formal restructure is by means of the regimes existing under the respective laws, which is often a costly exercise. An informal restructure is one that is carried out outside of the legislative framework which in most cases, if done early enough, can work out to be cheaper.
The goal of a restructure is continued viability or existence of the business, albeit, in a different form, where possible. A restructure may not always be possible and would largely depend on the financial circumstances of the company and feasibility of its business model.
Broadly, both the formal restructuring regimes and an informal restructure considers two key aspects of the company, operational and financial. Depending on the circumstances, a successful restructure can be achieved either by improving a company’s operations (e.g., increasing profitability), its financial position (e.g., reducing debt) or by a combination of both.
The options currently available under the law, for micro and small businesses to be restructured are limited, which is why it is essential for the owners of such businesses to obtain the right advice from specialist firms like Solvent, at the first sign of difficulties. The alternative may not prove to be as favourable.
■ If your clientele is primarily SMBs or SMEs, then perhaps we can also highlight the disadvantages that they have in terms of keeping an eye on the company health, compared to bigger companies and that have entire departments and CFOs to monitor that.
Refer to answer in question 7, not having a department is not of itself a reason, or a disadvantage. Instead of a CFO, the owner of an SMB or SME can always consult with their accountant in order to better inform themselves. Of course, it helps if the accountant / advisor is competent. Ultimately, it isthe director that bears responsibility if the company fails, and it is therefore in their best interest thatthey keep themselves apprised and have a reasonable knowledge of the financial health of the company / business.
Case Studies
Case Study 1 – Business Improvement
We have been advising a plastic fabrication and metal machining business, on an ad hoc basis since 2019.
We were approached by the owners when their business began facing financial difficulties, due to a downturn in the economy.
The business owners wished to find out if there were any options available for them to trade out of difficulties.
We sought to identify the inherent issues of their business and their underlying business model (which given the economic circumstances, was not the most suitable) and provided our recommendations to the owners on:
- Ways to improve upon operational efficiency and increase productivity;
- Areas for cost reduction; and
- Opportunities to increase revenue.
We understand that the owners have implemented some of the measures and that the business has seen a corresponding increase in the bottom line.
Case Study 2 – Bankruptcy matters
We advised a business owner on an impending bankruptcy application. Our client was the guarantor of a loan that was in arrears.
We started off by obtaining a detailed understanding of:
- The events that led to the default;
- The financial position of our client’s business; and
- Our client’s personal financial position.
On the back of the advice we provided, our client was able to successfully negotiate a resolution with the creditor in question and have the bankruptcy application withdrawn.
Case Study 3 – Bankruptcy trustee woes
We were engaged to assist in dealing with a claim by a trustee of a bankrupt estate against our client.
We wrote to the trustee highlighting several inconsistencies in the claim being made. Our client has not received any further correspondence from the trustee since.
Case Study 4 – Landlord distress
A dispute had arisen between our client and the landlord with regards to the occupancy of our client’s business premises.
Our client had received a letter from the landlord’s solicitor seeking compensation for alleged non-payment of rent, among other things.
Upon our client’s instructions, we wrote to the landlord’s solicitor, refuting the assertions that were being made.
Our review of the available documentation suggested that the landlord’s claims may have been erroneous.
As a result of our timely involvement, our client was able to vacate the premises without any further incident.
Case Study 5 – Ownership trials
We were approached to act as liquidators of a well-known and profitable human resourcing firm.
The owners had reached an impasse as to the future direction of the firm and were contemplating liquidation as a means to deal with their dispute.
Following our inquiries, we advised against liquidation. We were of the view that it would not be in the best interest of the owners as:
the cost of the winding up would likely be significant given there was a higher chance of litigation; and
it would be detrimental to the overall reputation of the business.
The owners have since not proceeded with the liquidation and reached an amicable resolution/ settlement.
Case Study 6 – Restructuring solutions
We were requested to advice a well-known chain of beauty salons that was facing difficulties. The business had expanded too quickly without adequate planning and resources.
The business had borrowed heavily, and the owners had invested a significant amount of capital to fund the ambitious expansion plans.
Unfortunately, the business fell short of expectations and eventually found itself in a position where it began struggling to pay its debts.
We undertook a detailed analysis of the business, its underlying fundamentals and provided our advice to the owners on how to:
- preserve value in the business;
- restructure the debts; and
- reorganise business operations.
The business, as we understand from our last discussion with the owner, has now stabilised and is expected to return to profitability in the next 12 to 18 months.
The information provided in this article is general in nature and is not intended as advice. We recommendbusiness owners or individuals who may be faced with the prospects of an insolvency event, seek advice atearliest from a specialist firm like Solvent, in order that appropriate measures can be developed andimplemented to deal with and, where possible, mitigate the risk.
No two situations tend to be alike. As a premier firm in small business restructuring and turnaround, Solvent has the experience, expertise, and knowledge to deal with even the most complex issues.
Solvent, as your go to one stop shop solutions provider, also works in conjunction with reputable specialistlaw firms in both Australia and Singapore, so that you do not have to worry about obtaining the right legal advice for your circumstances, saving you both time and money when you meet with us.
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