Five common themes we often see in faltering businesses

2021-10-25   minute read

Paul Pettigrew

There are many reasons a business may become insolvent, many of which are apparent long before it is rendered bankrupt or placed in receivership. It’s often thought external factors such as unfavourable market conditions and a sputtering economy are the leading causes of business failures. But as you’ll see leaders and owners often have much more control over their fate than commonly believed. It’s merely a matter of recognizing the signs and knowing when to make a change and/or ask for help.

Entrepreneur working with a digital tablet while standing in front of the counter of her trendy cafe

  1. Lacking clear or timely financial information
  2. One cannot overstate the importance of a quality internal accounting and reporting function. Management needs timely and accurate financial information (e.g., forecasts, variance analysis, etc.) to understand what challenges the business might be facing and where opportunities might exist.

    The COVID-19 pandemic is an excellent example of how many business leaders used financial information to pivot business models, preserve cash flow, and manage the constraints of a challenging situation. Those who couldn’t trust the numbers or access financial data quickly had a much harder time adapting to the rapidly changing situation — and many failed as a result.

  3. Poor management
  4. Often, we see entrepreneurs and leaders who don’t have an honest view of their business assets, future prospects, risks, or market and industry factors. These individuals tend to make short sighted decisions based on a combination of emotion, guesswork, and misguided intuition — and often resist input from those who disagree with them.

    Great ideas will get a business off the ground, but competent management skills are essential to keep it profitable and running smoothly. Both are necessary for a business’ long-term performance and financial prospects.

  5. Poor communication
  6. Clear, timely, and accurate communication throughout the organization is critical to ensure everyone is performing their role well and contributing to the business’ overall success. Any number of communication problems can spell trouble for an organization — from people failing to report issues, to poor document management, unclear reporting hierarchies, all the way to fraud and dishonesty.

    Proactive, honest, and up-front communication with major lenders is also key during periods of adversity. Lenders don’t like surprises, and deteriorating lines of communication may result in lender frustration and a lost of confidence in management. Formal proceedings are often initiated that may have been avoided if the lines of communication were open.

  7. Waiting too long to ask for help
  8. There’s usually a point where almost every business is salvageable. Unfortunately, too many leaders either feel they need to shoulder the responsibility of righting the ship or are unaware there are options which can help them drive the recovery process and avoid Bankruptcy or receivership.

    Common signs it’s time to reach out for help include:

    • Lender demands have been issued,
    • Canada Revenue Agency has sent enhanced requirements to pay,
    • Assets are being repossessed,
    • Landlords are distraining,
    • Etc

    The best leaders don’t only recognize when they’re out of their depth or beyond their power to act, they surround themselves with the right people with the right skills to achieve their desired outcome. When things aren’t going right in the business, there’s a lot of value in knowing when that person is a Licensed Insolvency Trustee.

  9. Market and industry specific conditions

Even for businesses that do everything right, shifts in commodities markets and foreign exchange can significantly lower margins, increase operating costs, and impact its ability to meet targets and satisfy bank covenants. Those that are not proactive about managing cashflow, contingency planning, and addressing their industry-specific conditions are especially vulnerable to such economic headwinds.

The pandemic has magnified the challenges and introduced new questions about how businesses will exist in this new environment. Even some of the best capitalized organizations have had to adapt and work with outside advisors to scenario plan and understand their opportunities. Those who have not been so proactive will find it much harder to find their way forward. 

Recovery is possible

MNP’s Corporate Recovery & Restructuring practice delivers solutions and advice to help businesses overcome financial difficulties. Our qualified Licensed Insolvency Trustees are knowledgeable in all aspects of Canadian Bankruptcy Legislation and skilled at helping leaders / owners and their creditors achieve mutually beneficial outcomes. 

If you’ve noticed any of the above challenges in your business, consider assessing your situation on your crisis meter — then reach out to your local MNP LTD. office for a comprehensive review of your financial situation and prospects. Driving the process helps preserve stakeholder confidence and maximize your options for recovery.