A distressed business is one that is not performing up to the mark or is faced with some kind of trauma which financially handicaps it. A distressed business is unable to meet its financial obligations because it cannot generate enough income. Hence it cannot meet everyday expenses.
A distressed business can be thought of as a troubled business. A number of factors contribute to making a business distressed. Some of these are
- Higher fixed costs
- Non-liquid assets in high proportions
- Poor budgeting
- Over spending
- Unwise spending
- Poor decisions
- Environmental factors
- Poor management
- Failure to keep up with changing market trends
- Poor Marketing
Every business is unique and different. Therefore they will all have their own reasons for falling into distress and the way they cope with them is going to be difficult as well.
How To Tell If A Company Is in Distress
Now, how do we know whether or not a business is in distress? You cannot just look at a company’s balance sheet and say that it is in distress. There are other ways to tell that. Of course, the most apparent sign is that the business is not making enough profits. If the business is struggling with break even, then that can also be a sign of distress.
Without ample cash, the business will try to raise funds from external sources. This increases business risk and lowers credit rating among the company’s creditors, suppliers, investors, and banks. Other indicators can be declining sales or a poor sales growth rate. This indicates that there is no demand for a company’s product or services. This may be due to the product or the business model.
Sometimes, even costly marketing campaigns don’t help. If the marketing campaigns result in no sales growth, this may indicate that the consumers are no longer satisfied with what the company has to offer and the company might go bankrupt! Similarly, if a company is offering substandard or poor quality products , consumers will be more likely to buy from competitors. This will lead to poor sales and hence no profits. Again, leading to distress and bankruptcy,
When a company is lazy in paying debts, this makes it unreliable. It also stretches the cash flows by a mile. The credit worthiness is lowered immensely.
How Can A Business Come Out Of Distress
While financial distress may seem like a permanent situation, there are certain ways by which you can give your company a helping hand and try to pull it out of its distressed state. Let’s see how we can remedy financial distress.
Your first priority should be to revise your business model and business plan. This must include its operations, product, marketing, and performance in the market. Goals must be set and target dates as well. There should be a fixed time for companies to meet these goals.
You also need to take a look into your income statement and cut off all those unnecessary expenses and costs. This may lead to downsizing or maybe cutting back on some incentives given to employees and management. These incentives can often be costly to a business. This includes expensive health care plans.
Some businesses go for restructuring debts. In debt restructuring, companies which are unable to meet their obligations can try to renegotiate their debts and alter the repayment terms in order. This is done to increase their liquidity. These renegotiations, if successful, allow the businesses to continue their operations.
Let’s look at an example of a company that was faced with distress but turned its situation around in an instant
The example is about a global pharmaceutical company (public limited) that recovered from a loss of USD 235K in the first quarter to having a year-end pre-tax profit of USD 790K. By the next year’s first quarter, it had a pre-tax profit of USD 1.1M. It achieved all this through the following processes:
- Re-engineering of its internal controls
- it started Implementation of new financial systems and ERP systems in Israel and Canada
- It established infrastructure for conducting new financial reporting;
- It worked with its CPA firm to establish certain tax planning programs and at the same time reducing taxes by USD 700K
- It Worked with several bankers to for restructuring their line of credit
- It replaced some of its key personnel with new professionals.
So, while a business might seem to be hopeless when in distress, having the right management approach and the right roadmap and business plan can make the business go miles. As you can see, in the example, the company was initially suffering such strong setbacks. It may have seemed like it was going bankrupt and would close down soon. But the management took the right approach and took several steps to prevent the company from failing. In a similar fashion, all businesses need to act smart for effective business functioning. If you’re looking for distressed businesses for sale in Australia, then check here.
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