Financial Recovery Articles
Cash strapped? Before seeking a loan, identify underlying problems
Business Times
July 2006
Low interest rates and eager lenders are a tempting combination for business owners experiencing cash flow challenges. Why not take on a bit more debt to get through a temporary period of difficulty?
Unfortunately, financial difficulties are often a symptom rather than the underlying problem. Typically, taking on additional debt simply compounds the problem.
One of the downsides to the availability of cash today is that many business owners are focusing on short-term reprieves rather than long-term fixes. If a company is experiencing financial instability, however, it’s vital that the business has the appropriate financing for the situation. It’s also vital that that the owner identifies the underlying issues before assuming additional financial obligations. Owners need to know answers to questions such as:
- Are the balance sheet and income statement healthy?
- Is the business plan viable?
- Is the core business sound?
- Is market share growing?
- Is the customer base sufficiently diversified?
- Is the management team capable?
- Are operations efficient?
- Does the company have good relationships with its lenders?
If there are significant problems in any of these areas, they need to be addressed – or new capital will simply generate new complications for the company: more obligations, more debt, more pressure.
Since it’s challenging for a business owner to objectively evaluate the situation and to develop appropriate solutions, a restructuring professional can be a valuable ally. With the goal of maximizing value, these professionals assess the health of a business, identify the best options and develop a plan of action.
Having a broad network of debt and equity lenders, they can also assist in securing needed capital. They are experienced with matching needs to the appropriate financing and lenders: from banks to angel investors, to specialty funds, high net worth individuals and strategic buyers. In some situations, new funding sources may not even be necessary; the best source of capital may be as simple as requesting concessions from a company’s suppliers and customers.
Restructuring professionals offer business owners a range of benefits. When a company is in a state of uncertainty or transition due to financial pressures, a pending sale or succession, these professionals can help to manage trade supplier relationships to alleviate immediate cash flow challenges, strengthen the company’s relationship with the bank, present ways to reduce liabilities, assist in securing debt forgiveness, and develop strategies to restructure and improve operations. For business owners, there is little downside involved in contacting a recovery professional because there is typically no charge for an initial consultation.
Restructuring professionals utilize a thorough, objective analysis of the business from which they develop practical solutions. They will assess the organization’s market, products or services, marketing, production, human resources, management expertise, and financial operations and then help management to develop a plan of action, outlining the best options based on the company’s strengths and weaknesses and the reality of the marketplace. If the business has long-term potential, they will address ways to infuse capital and to increase revenue and, ultimately, value.
The plan of action may involve immediate, short-term and long-term components:
- cash flow control and expense management to alleviate immediate pressure,
- a plan to stabilize operations, and
- a financial and/or formal/informal restructuring to strengthen the business or to add value.
The important point for business owners to keep in mind is to resist the temptation of additional debt until first analyzing the causes leading to the current financial challenges. A comprehensive review will yield valuable insights, financing that matches needs – and a business with more value.
Vince Siciliano, CGA, CIRP, is the senior principal for the Mississauga/Peel region of BDO Dunwoody Limited (www.bdo.ca). He specializes in restructuring small to mid-size commercial businesses and professional practices. You can reach Vince at (905) 615-8787 or vsiciliano@bdo.ca.
