Small business: When things get tough - David Webb

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David Webb. Photo / Supplied
David Webb. Photo / Supplied

David Webb is the NZ managing partner of PPB Advisory. He recently presented to 100 SME business owners on the early warning signs of trouble in a business. He talks to Gill South.

When should SME business owners put their hand up for help if things are just getting too much?

In our experience the most common reason for SME business owners needing to ask for financial assistance is that they are too busy working in the business and not spending enough time working on the business. They are spending too much time on the operations, and not enough on the strategy.

Management quality is a major determinant of business success. Practically, that means management teams must be attuned to market conditions, their customers, their suppliers, employees, in addition to their financial performance.

Business owners should also be aware that there are no quick fixes however with early and sustained effort, and advice from an adviser, they heighten their chances for a turnaround.

What are the warning signs?

Most business owners will be aware of the classic warning signs such as a lack of cash or overdraft facility. This typically results in delayed payments to creditors and direct debits being bounced. However, in our experience, management quality, a focus on operational rather than strategic issues, and falling staff morale can also be important warning signs that a business is in trouble.

Who should an SME owner contact when they identify some warning signs?

Every SME owner should have a trusted external accountant, lawyer or business advisor that can help them draw up a plan as to how they can stabilise and turnaround their business. The next port of call should be your relationship manager at your bank, ideally with your external advisor. Your bank may be able to provide financial assistance if the position is temporary, or may be able to refer you to a turnaround expert if the situation appears to be a longer term issue.

The regional councils can also be a good source of information. They are currently promoting business growth and may have access to partially funded business advisors through NZTE.

What are some practical, immediate steps business owners can take?

If SME owners could take one thing away from this article, it should be the importance of short to medium term cash flow forecasts. Once they identity warning signs, they should start to prepare a forecast and seek the input of their external advisors to assist them in the preparation of a turnaround / recovery strategy.

A cash flow forecast will provide the bank with assurance that the business has matters in hand and have a feasible plan for recovery. It will also allow SME owners to plan payments to creditors and hopefully agree repayment plans whist maintaining ongoing trade.

It's important to engage with the IRD early. If a problem is brought to them with a solution, they are more often than not willing to work with a business. If the SME owner does not engage with the IRD or takes a confrontational or aggressive approach, the IRD can become an aggressive creditor in recovering its debt.

Where do you see people making mistakes on the steps they take?

We often see business owners bury their head in the sand. They hope that things will improve and that they can just trade their way out of the situation. In our experience, this only hastens business's demise.

Business owners must take swift and decisive action, they should prepare a cash flow forecast, plan a turnaround strategy and seek external advice and proactively engage with all their stakeholders.

It is critical that business owners face up to the situation they are in and engage with their stakeholders such as management, employees, banks, IRD and trade suppliers to ensure that everyone understands the position and is working towards the goal of turning around the business.

How quickly can things be turned around in your experience?

This depends on the circumstances.

If the underlying business is solid and profitable and sales haven't dropped it may be able to be manage a turnaround in a three to six month time frame.

If there are problems with the underlying business, it may take six to 24 months to turnaround the business while you target the problems or look to downsize. A significant period of good trading and cash inflows to repay creditor arrears are required if downsizing is pursued.

Business owners need to have a positive attitude and they need to accept they will have to seek external advice. They will have to listen to it and they will have to put it into action - or keep an open mind if they robustly challenge the advice if they disagree

Ultimately they need to accept that this is hopefully only a temporary blip, that it can be fixed and that you should keep staff informed and motivated.

It's that time when businesses are thinking of ways to thank their loyal customers. What should SMEs with limited budgets be trying to say with their gifts, how do they make an impact that doesn't cost the earth? Send me, Gill South, your ideas here.

- NZ Herald

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