Canadian Association of Movers L'Association canadienne des déménageurs

How Do You Know When Your Business is “Under the Weather”?

By Philip H. Gennis, LL.B., CIRP The owner-managed business is faced with a number of challenges on its road to success, many of which continue even after the business has achieved its goals. The institutions lending to these entrepreneurs are consistently monitoring the financial and business realities of the venture, on issues such as account and financial performance, financial reporting, and operational systems and organizational management. In light of globalism and the significant impact of technological change, lenders are taking much more time to fully understand their clients’ businesses and are thereby better positioned to recommend change. It is no longer an acceptable line of argument that because something works fine, it need not be fixed. We have been fortunate to enjoy some relative prosperity in virtually all business sectors over the past number of years. Businesses have expanded and owners, seeking a balance between work and family, have entrusted the operational and financial management of the venture to others. Notwithstanding and ever mindful of the speed with which fortunes shift, we believe that it is incumbent upon these owners and the professionals advising them to better understand the warning signals indicating that trouble may lie ahead. Through this understanding, the owners and their advisers become hands-on and instrumental in building internal resources that are strong enough to withstand the winds of economic change. These resources also ensure that their lenders will not abandon them at a time when the need for their support is paramount. These "early-warning signs" are applicable across the entire business spectrum and should be analyzed on a periodic basis as key indicators of the health of a business. They appear here in no particular order: Borrowing is extended to the limits negotiated with bankers Major discrepancies between internally prepared and audited financial statements Persistent operating losses Significant variances between actual and projected results Excessive build-up of receivables and/or inventory, both of which are turning over more slowly from year to year as against industry standards Build-up of trade payables and crown obligations Lack of useful and timely financial information Lack of budgeting Unrealistic annual projections and cash-flow forecasting Lack of meaningful follow-up on negative variances from budget Over-ambitious expansion and/or acquisitions Inadequate capitalization Problems with technology High concentration of sales to a small number of customers High fixed costs in a business with unpredictable results Increase in competition Little, if any, delegation of authority Aging ownership without an established succession plan Family members with conflicting ideas and interests Many mouths feeding from the same trough Lack of a clear business plan Turnover of key personnel Although the above list is not exhaustive, we have determined from our experience that its items represent the key indicators of an enterprise in distress. We are not suggesting that when any or all of the above conditions are detected that the end is near (although, in some cases, it may very well be). Rather, we present these indicators as measures for use by an owner or entrepreneur in analyzing the performance of those managing his or her business. Clearly, if these situations are tackled early enough, much can be done to "save the patient." Philip H. Gennis is a licensed Bankruptcy Trustee managing a full-service insolvency practice in the Markham office of Grant Thornton Limited. He can be reached at (416) 777-7221.

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Posted November 22, 2002