Seven stages of business recovery
The first step for any organisation in avoiding succumbing to finance difficulties is awareness. Here ICAEW outlines the seven stages of business recovery, which follow the decline and recovery curve.
It may seem counter-intuitive to think about failure at a time of growth. But there is evidence that the busiest times for Insolvency Practitioners (IPs) are in periods of economic growth and especially during the recovery from recessions.
Businesses that have struggled to make sales but have survived, can find themselves inundated with orders. This can lead to a loss of financial discipline and liquidity issues as cash is sucked out of the business to fulfil orders well before payment is received.
Early signs of underperformance can be difficult to spot.Unless there is a sudden and catastrophic disaster (a sudden loss of key staff, a new competitor with a better or cheaper product), it is possible for a business to trade apparently successfully while things go wrong under the surface.
If no remedial action is taken, an underperforming business can quickly slip into distress, entering what is sometimes known as “the zone of insolvency”. Remember that this is a distress situation and not yet a crisis.
At this stage it is far from certain a business is bound to fail or indeed bound to enter any formal insolvency process. If owners haven’t acted to restructure or resolve potential problems, this is the time to.
Having entered into a situation of distress, it is more likely than not that some external agency will be required for the business to survive and get back to performing as it should.
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While the word crisis is somewhat overused in modern life, a business that ignores signs of distress will eventually hit crisis point.
The business may get into extreme difficulties due to a lack of liquidity that makes it impossible to meet overheads, pay staff, taxes and fines or simply finance the running of the business.
Without cash, it is a fair assumption that any business will seize up, stagnate and eventually die.
It is better, even at such a late stage, to seek help and advice than to ignore the problem.
5. Crisis management
There are usually several routes out of a crisis, but not all lead to the same outcome in the long term. For most business owners there are two clear options – save the business or just let it collapse.
Having acted in time and averted a crisis, an IP or other advisers can work towards a longer-term plan to put the business on a more sustainable footing.
Depending on the ownership model and actions taken to date, this may mean bringing in a new senior management team.
Is there a better feeling for a business owner who has been through difficult times than knowing the business is back in business?