When Business Distress Is the Symptom, Find the Cause

When a business gets into financial trouble, the natural reaction is to start looking for a solution.
Cut costs. Find funding. Negotiate with creditors. Enter business rescue. Sell assets.
Sometimes one of those is exactly the right thing to do, but not before understanding what actually went wrong.
A cash-flow problem, for example, tells you that the business is in trouble. It doesn’t necessarily tell you why.

The underlying cause could be weak margins, poor governance, overtrading, excessive debt, inefficient systems, management failure, the loss of a major customer, a change in the market, deliberate sabotage, or several of these things happening at once. And that distinction matters.
Some can recover through an operational turnaround without ever entering a formal legal process, others need a compromise with creditors either through a Section 155 compromise, or in a business rescue procedure. While sometimes the uncomfortable conclusion is that there simply isn’t enough time, cash, support or capacity left to justify trying to rescue the business. In those circumstances, an orderly wind-down may preserve more value than carrying on.

This is why we believe the first question shouldn’t be:
“How do we save the business?”

It should be:
“What truly caused the distress, what remains to work with, and is the business realistically recoverable?”

That is the purpose of our Business Fundamentals Analysis & Turnaround Assessment (BFATA).
We look at where the distress came from — internal, external, or both — and then at the resources still available to respond to it: cash, time, management capacity, creditor tolerance, stakeholder support and access to funding.

Only then do we consider the appropriate route. That may be an operational turnaround, business rescue and a trade-out, a Section 155 compromise coupled with operational restructuring, an orderly wind-down or liquidation.
Where turnaround is viable, there is another question that has to be answered: what needs to change so that the business doesn’t end up back in exactly the same position? This is most often the question on which creditor support hinges on.

That’s where speaking to the people around the business becomes important. Management rarely has the whole picture. Neither do employees, creditors, suppliers or customers individually. Taken together, however, they can reveal a great deal about what is really driving underperformance.
Financial distress is the symptom. The job is to diagnose the cause before prescribing the cure.
As they say in medicine, “Accurate diagnosis precedes effective cure.”