Distressed businesses in Australia try to buy themselves valuable "turnaround time" by restructuring either formally or informally. The formal restructure is usually via the Voluntary Administration (VA), whilst the informal restructure usually involves refinancing existing debt facilities to free up securities and access more capital against those securities.
If you want to see a history of the VA process in Australia, or a summary of recent legislative reforms to the VA process, follow the links highlighted here.
It is important to understand that both of these financial engineering measures do little more than buy time. They take away the immediate problem (inadequate access to working capital), but don't by themselves solve the underlying problems that caused that shortage in the first place.
Distressed business need to use the "bought time" wisely if they are going to prosper in the longer term. They need to do four simple things: They need to (1) generate sufficient revenues at (2) adequate margins whilst at the same time managing (3) overheads and (4) the capital structure.
Here is a simple tool - the Ninja Business Turnaround Matrix - that might be used to analyse the chances of success. Note that it is (quite obviously we think) designed for the SME scenario. Here projected (After) and actual historical (Before) monthly revenues are compared. The actions that are hoped to give rise to any improvements are listed, along with their chances of success. By using this tool to review the proposed turnaround, the credibility of the exercise can be gauged. What needs to be done? What skill sets and resources need to be acquired in order to implement the proposed actions? What will the business look like after the turnaround? What are the areas of the turnaround that require the most attention (the low probability of success items).
Each "Action Item" listed needs to be explored for its alignment to both the proposed core strategy of the business and the "business model" itself. Challenging issues surrounding market positioning strategies for example (that will underpin revenue forecasts) need to be understood and addressed. These deeper issues will be considered in future posts.
Regardless of the tool or framework used to analyse the turnaround, the questions raised by the matrix need to be resolved before an expensive formal restructuring is considered and before the owners of the business bet more of their personal assets on the future of the business. If you are looking for formal restructuring advice, the Cash Flow Ninjas recommend you consult the directory of the Australian Chapter of the Turnaround Management Association.
As always I look forward to your comments.
