Focusing on viability will help avoid insolvency

Jun 18 2009 By The Journal

Joe McLean of Grant Thornton has spent 25 years helping companies avoid insolvency. He finds the same issue crops up again and again – a focus on business not profit.

WHEN you switch on the lights of your business on a Monday morning, do you know whether you will make a profit in the coming week?

If the answer is ‘don’t know’ it begs the question ‘why not?’ And if the answer is ‘no’ then the question is ‘what are you doing about it?’.

Over the last 25 years of providing business advice I have found that the issue of inherent viability has always been critical. All other business decisions flow from this point.

My experience shows that nearly all the businesses that end up in a formal insolvency process, such as administration or liquidation, do so because of problems that are rooted in a lack of inherent viability.

Viability and cash go hand in hand, but not always together.

A business that is unviable can trade for quite some time until the cash finally runs out, usually around the time that the patience of its creditors expires.

Football clubs provide a good example of unviable businesses only able to continue thanks to the benevolence of a chairman with deep pockets.

But healthy businesses can also fail, simply because they run out of cash and in a recession – where the availability of funds is limited – the risk of such failures increases.

Sometimes a business owner confuses a lack of viability with a lack of cash. Consider a director who doesn’t really know whether his business is viable but recognises that it needs more cash. He thinks the solution to the problem is to go to his bank and ask for a bigger overdraft.

But, in my view, that director should not be looking to borrow more money without first ensuring that the business can actually afford to borrow it, and even more importantly, repay it.

Which brings us back to viability.

If you don’t know whether your business is viable then you need to organise expert impartial advice.

If your business is not viable then it is imperative to seek assistance in determining how viability can be restored. Changes will have to be implemented that either grow the top line or cut costs.

Difficult decisions will have to be made that risk upsetting customers by increasing prices, or employees by making redundancies. Doing nothing is not an option.

The natural instinct in times of trouble is to focus on cutting costs, but growing the top line is equally important.

There are some fundamental questions that every business should consider. Who are your customers? Should you have more? Should you have less? What do your customers want now – and in the future?

Armed with answers to these questions a director should be able to create a business model that demonstrates viability. If not, then professional advice should be sought to determine the options for the business, some of which may well be unpalatable.

In today’s difficult economic climate, financial advice that reflects life in the real world may need to be hard-nosed.

However, I feel I owe a duty to my clients to tell them how it really is, even if that is not what they want to hear.