As businesses approach the end of the year, it's time to take stock and ensure that affairs are in working order before shutting down over the Christmas and New Year's break.
The current New Zealand economic climate affords more opportunities for growth. This means there needs to be a framework for SME/owner-operator businesses to conduct regular health checks that focus on key areas of risk that can be identified early to assess whether their business is experiencing financial distress.
Reviewing a company's capital, governance, operations and being aware of what the market is doing, can provide a number of early warning signs and key triggers to analyse the state of your business - before it's too late.
Business health checklist
• Additional funding requests - requesting funding over and above those forecast by the company can be a tell tale sign that all is not well. This might be in the form of multiple overdraft extension requests or request for new funding lines, such as, equipment finance or term debt.
• Having alternative bank accounts - this can be a risk if a company has its debt facilities with Bank A, but uses Bank B for its transactional banking.
• Breaching facility limits and covenants - this can take the form of a company breaching its overdraft facilities with multiple excesses each month.
• Default on debt repayments - failure to make debt repayments in line with agreed terms can be a key indicator for financial distress in a company.
• Lack of strategic direction - a company should have a clear business plan with measurable milestones and targets. A lack of direction may result in a company underperforming.
• Change in control or ownership - a change in control can seriously impact the way in which a company operates, this can occur through the sale of a company to new owners or simply be the result of key personnel taking annual leave or an extended break.
• Key staff leaving - if your business success is dependent on key personnel who have specialist skills or are crucial because of their in-depth knowledge of how to perform a task or who have access to a number of key customer contacts, the organisation can become vulnerable. If this individual were to leave a company without passing on the knowledge or contacts, it could affect the viability of the business.
• Material or adverse market change - changes in market conditions can impact the way in which a company operates and therefore demand for its good/services. For example, a new competitor entering the industry, new technological developments or changes in legislation. It's important to be aware of what's happening in your industry, so that your business can be prepared for any changes before they occur.
• Working capital deficiency and trading losses - a deficiency in working capital may indicate financial distress or could also be an indicator of overtrading. Similarly, ongoing trading losses (as these need to be funded somehow and cannot continue indefinitely), can also be an early warning sign.
• Accurate financial reporting - ensuring that your company's financial reporting is up to standard is vital, you don't want management and directors making key decisions based on incorrect information.
• Action taken by a creditor - do you have any outstanding statutory demands against the company? The existence of payment plans with suppliers and other creditors, such as the IRD, can be a potential sign of financial distress.
To give you peace of mind over the much needed summer holidays, make sure you conduct a health check on your business pre-Christmas. The quicker you can recognise any of these signs and act upon them, the more likely the business can return to a healthy position and be positioned favourably to go for the New Year.
David Webb is the NZ Managing Partner of PPB Advisory.