Financial underperformance

In a rapidly changing corporate landscape maintaining a position of financial solvency is a constant challenge for companies and their management teams.

Preoccupied with the task of running their business, managers sometimes fail to stand back and look at the bigger picture. They fail to ask key questions of the company, and sometimes of themselves, on issues that can fundamentally affect the financial underperformance, and therefore the survival, of their business.

A downturn in fortunes can be sudden and may lead to companies facing financial difficulties. Such a downturn can be triggered by events such as:

• Economic / political uncertainty
• Changing market behaviours
• Competitor pressure
• Technological advances
• Operational inefficiencies
• Lack of strategic planning
• Disputes
• Fraud
• Changes in the regulatory landscape
• Loss of major contract

Whether these or other factors happen simultaneously or in isolation, their impact can be serious and sometimes irreversible if early and proactive remedial action is not taken.

Management teams should always be alert to the early warning signs of demise and take a proactive stance. Companies often exhibit symptoms of decline well before any crisis erupts. For example, missed trading targets are often the first sign of underperformance. Management dismiss the symptom as a short term problem that can be quickly remedied without the need for radical action. If, however, the underlying cause remains unchecked, the decline may well continue.

When underperformance persists, many companies suffer from 'active inertia', where management implement strategies or actions which may have resolved similar situations in the past, but which may not be appropriate in the current competitive environment. Companies may therefore be faced with continued difficulties and slide further towards insolvency.

Armed with the right situational advice a company can preserve its value and retain the confidence of its stakeholders. Early detection of any warning signs and swift remedial action is essential. This buys time, allowing longer term actions including refinancing and/or restructuring to be taken, that can restore performance and value to the business. Insolvency can be avoided by stabilising the situation, and a number of different options can then be pursued by a company and its management team to redress the situation.