Seven habits of highly vulnerable companies
By the time investors, shareholders or banks reach for specialist assistance there may be little choice but to let the inevitable take its course. Earlier action offers more options to management but remains dependent on spotting business problems early.
In our experience with small and medium sized businesses, certain habits can be identified that regularly contribute to business difficulties. Noticed early enough, these habits are early-warning signals of possible difficulties ahead and if acted on, they open the door to effective intervention and higher chance of rescue and revival.
Denial
Business leaders are understandably reluctant to reach for outside help as they too often add more cost than value. Instinctively management gets so close to the business that they cannot focus on key issues or they have simply lost sight of them. At this point objective assistance may be required.
Acquisition fever
When a business that has traditionally grown organically starts heading down the acquisition trail, caution is required. Debts will soar, soaking up any free cash flow and the assimilation of the new company is invariably more difficult than it initially seems. The period for merger integration is always longer than ultimately planned for.
Silver Lining
Balance Sheets weaken once management start to convert capital assets into profit. A common form of this is the sale-and-leaseback of properties and other assets. This distorts the actual operational effectiveness of the company and may lead to the delay of management taking corrective action.
Eyes wrong
There can be long periods when nothing much out of the ordinary seems to be happening in the business. As a result management are tempted to try new sorts of activity simply because they feel bored with the routines of the core business. Diversification, experimentation and expansion results in a loss of focus, that usually ends up affecting performance.
Cash control
Cash is to a business as blood is to a human being – without proper control a company is slowly sapped of its lifeblood and becomes anemic. Management frequently delegates the control of cash to lower management and eventually only takes control of it at a stage where recovery is difficult. The generation of cash remains the single most important goal of any viable business.
Bleeding Edge
Any business has to stay competitive and these days this includes information technology. A good system, installed on-time and within budget, can open up new commercial opportunities and make the business more efficient. A poor system poorly installed, can cause disaster. Computer tycoon, Michael Dell, acknowledged that leading edge can easily become bleeding edge.
Generation X
1.Corporate succession is fraught with egos and stress with the risks being greater in an SME because ranks are leaner. New leaders invariably want to change the way things are being done and this causes uncertainty amongst staff and clouds the judgment of management.
Just as throwing a six with one die carries a chance of one in six, throwing two sixes with two dices carries a chance of one in thirty six. Similarly, it pays to be wary of a business with any of the seven habits listed above and the risks increase dramatically if more than one is prevalent at a time.
Author Ricardo Graham
Director
Maximus