Business rescue is one of the key services that Indalo Business Consulting offers. It gives companies that are in financial distress solutions and are ideal candidates for the process (remember that not every company can be rescued), an opportunity to salvage value and continue operating.
The significant disruption that companies face in the current environment is part of the new normal that has been created by the Covid-19 Pandemic. No company is immune to this. The alcohol industry, once thought of as an industry that will not be impacted by the Pandemic, is facing major constraints because of the global supply chain crisis. Alcohol producers, such as SAB and Distell, cannot source the glass and aluminium that is necessary to package their product. SAB and Distell were both forced to advise their clients that they cannot fill all of the orders that they received. For tavern owners, this is bad news with one tavern in KwaZulu-Natal – which had been in existence for 15 years – forced to close its doors.
With the Pandemic showing no signs of going away, companies will face increased disruption. What are some of the signs that a company is facing financial distress? I recently read an interesting article on the BMD website discussing this.
CASH FLOW PROBLEMS
The article points out that the first sign things are going wrong is a constant lack of cash. All businesses suffer periodic dips where cash is tight. However, if cash flow is continually a problem, the business is likely in trouble. If a business is continually spending more than it earns unless it is deliberate and well-funded (as with some start-up businesses) it will lead to problems. If money is coming in, but there is never enough to pay the bills, this is an indication that you need to look at the cash flow for your company.
“If your business needs to delay payments to creditors, this can force some suppliers to cut off the supply of vital components or ingredients.”
EXTENDED TERMS
The article points out that being slow to pay is not as bad as not paying, but it can be an indication your business is in financial distress. A sign of possible trouble is a rise in either debtor or creditor days.
If your business needs to delay payments to creditors, this can force some suppliers to cut off the supply of vital components or ingredients.
Likewise, if you are unable to effectively collect payments it may cause future cash flow problems. Either way, sudden changes in these numbers should be investigated to see whether they are signs of something more serious.
One important caveat to note is that Covid-19 has created many temporary accommodations by lenders, landlords, and suppliers. Extended terms based solely on business interruption are likely more manageable than systemic extended terms caused by other non-Covid-19 related factors.
Additionally, we are two years into the Pandemic, the Covid curve ball should have been addressed by now. If it isn’t, it’s a sign of distress because we don’t know how long the Pandemic will last for.
HIGH INTEREST PAYMENTS
The article adds that your lender is likely evaluating your creditworthiness on a regular basis.
Large amounts of debt service and high interest payments could indicate poor financial health and be a sign that your bank or other lenders are suspicious of your viability.
If lenders view you as high risk, funding debt will cost more. It is also a bad sign if lenders always seek stronger personal guarantees or security against any money they lend.
SALES ARE DECREASING
The article points out that Covid-19 has created decreased business operations – and likely sales – for a significant number of businesses. If you don’t have money coming in through product sales or client purchasing your services, then it is time to figure out the problem.
The failure to do so could lead to financial distress. The stagnation could be directly related to Covid-19, which means that you can anticipate that things will increase again in the future. However, revenue decreases could also be due to previous adjustments in your marketing campaign or a difference in the inventory that is available. It is essential to know what your customers need and want so you can be sure that your products and services are designed to match their needs.
Covid-19 has created an opportunity for many businesses to pivot on how they deliver products and serve customers.
CUSTOMERS ARE NOT COMING BACK
The article adds that repeat customers are a sign of a healthy business. The lack of repeat customers could be a sign of financial distress. Company growth can be increased by the rate of repeat customers. Lack of growth coupled with one of the other signs of financial distress may create long term problems for a company.
To adapt to the Covid-19 crisis, you need to maintain communication with current and previous customers, helping them know where to go when it is time to make another purchase. Keep your company at the top-of-mind so customers know that you are always there to support them when they need help in the industry.
LET US MANAGE YOUR DISTRESS
The above list is not exhaustive, and many companies may have unique indicators that they are facing financial distress let us find you finacial distress solutions.
Indalo Business Restructuring has been helping companies manage and navigate their distress since 2018. Send an email to admin@indalobc.co.za today to book your appointment.
What's Inside
- Conduct a full business health check using SWOT and financial analysis tools
- Recognise early warning signs of distress before they escalate
- Identify your risk exposure and learn practical ways to manage it
- Understand the difference between business rescue, restructuring, and liquidation
- Build a recovery plan and communicate it effectively to teams, creditors, and stakeholders
- Gain expert insights and lessons from real-world business turnaround cases
- Explore business funding and post-commencement finance strategies
