Businesses undergo financial distress when they are unable to meet their financial obligations. Most businesses will experience some form of financial distress at some point in their lifecycle. While some businesses are able to quickly recover, others may find themselves struggling for extended periods of time. This situation requires careful management and strategic decisions in order to make the most of the situation and eventually return to profitability. This process can be difficult and stressful, but with the right approach, it is possible to successfully navigate financial distress. There are a number of factors that the management of a company in financial distress should consider in order to improve its chances of recovery. Powell Associates Ltd suggests the following:
- Assess the financial situation and identify the root causes of the distress.
This is the first and most important step in managing financial distress. Without a clear understanding of the financial situation, it will be difficult to make informed decisions about how to improve the situation. There are a number of ways in which a company can assess its financial situation. One approach is to perform a financial analysis to identify the sources of distress and potential solutions. Another approach is to use a financial health assessment tool to measure the company’s liquidity, solvency, and profitability. Once the root causes of the financial distress have been identified, management can begin to develop a plan to address the situation. A company may choose to pursue a Members Voluntary Liquidation (MVL). This is a process whereby a company’s assets are liquidated and the proceeds distributed to creditors and shareholders.
- Develop a plan to improve the financial situation.
The plan should be designed to improve the company’s liquidity, solvency, and profitability. The goal is to stabilize the financial situation and return the company to profitability. One way to do this is by reducing expenses. This can be accomplished by cutting costs, negotiating better terms with suppliers, or reducing discretionary spending. Another way to improve the financial situation is by increasing revenue. This can be done by growing the customer base, introducing new products or services, or increasing prices. If you happen to run a healthcare facility, also consider hiring a revenue cycle management (RCM) company. A list of the top RCM companies is linked here.
- Implement the plan and monitor the results.
Once the plan has been developed, it is important to put it into action and monitor the results. This may require making some difficult decisions, such as reducing staff or cutting costs. It is important to stay focused on the goal of returning the company to profitability. The results of the plan should be monitored closely to ensure that it is having the desired effect. If the financial situation does not improve, it may be necessary to revise the plan.
- Communicate with stakeholders.
During times of financial distress, it is important to keep stakeholders informed of the situation and the steps that are being taken to improve it. This includes shareholders, creditors, employees, customers, and suppliers. Open communication can help to build trust and confidence in the management team. It can also provide vital information that can be used to make better decisions about the future of the company.
- Consider all options.
When a company is facing financial distress, it is important to consider all of the available options. This includes both traditional and non-traditional options. Traditional options may include:
Refinancing-In this option, the company takes out a new loan to pay off the existing debt. This can be used to improve the terms of the debt, such as the interest rate or repayment period.
Asset sales-The company can consider selling some of its assets in order to raise cash. This can be used to pay down debt or fund operations.
Non-traditional options may include:
Private equity investment- A company can seek out a private equity firm to invest cash in exchange for an ownership stake in the company. This can provide the company with the capital it needs to fund operations or pay down debt.
Government assistance-The company can also apply for a government grant or loan.
- Seek professional help.
Seeking professional help is often a good idea when a company is facing serious financial difficulties. These professionals can provide valuable insight and guidance that can be difficult to obtain on your own. There are a number of different professionals who can help a company in financial distress. These include accountants, insolvency practitioners, and turnaround consultants. Accountants can help to assess the financial situation and identify the root causes of the distress. Insolvency practitioners can provide guidance on how to deal with creditors and negotiate with them for more favorable terms. Turnaround consultants can help to develop and implement a plan to improve the financial situation.
The best option for a company in financial distress will depend on the specific situation. It is important to weigh all of the options and choose the one that is best suited to the needs of the company.