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Support for businesses impacted by COVID-19.

How to turn around the finances of a struggling business

The quality of the relationships with your partners is often the determining factor in getting back on track
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A difficult business environment, a business succession that is not going according to plan or management problems... many factors can cause businesses to struggle. Fortunately, there are a number of solutions to get a business back on track.

“In this area, the key is to act before it’s too late,” says Christian Bourque, partner in charge of PwC Canada’s Financial Advisory and Restructuring group for the Quebec region. “That’s what gives you room to work with partners. The cases that work out are those where an owner recognizes problems and ensures that they have the support of their partners to execute a plan in a structured and effective manner.”

“Entrepreneurs are often reluctant to talk to their bankers about their financial problems. In reality, it is in their best interest to take the lead with their bankers with a well-thought-out recovery plan,” says René C. Leduc, Vice President, Business Restructuring at BDC. In this way, the bankers on file will become their best allies to help them get out of the situation and the entrepreneur will retain control over the destiny of his business.”

Mr. Bourque and Mr. Leduc offer the following tips to help turn a troubled business around.

1. Ensure the immediate survival of the business

“One of the biggest challenges for entrepreneurs in a precarious financial position is to make such difficult decisions, often for the first time,” Mr. Leduc explains. In fact, this situation may prove to be an opportunity to put measures in place that should have been taken long ago, but that did not seem urgent. One thing is certain, the status quo is not an option and you must not stay in denial.”

The first step in turning around a business’s financial situation is to ensure its immediate survival. This involves making sure that the funds needed to continue operations in the short term will be available.

To do so, you must first prepare financial forecasts to determine your short and long term cash flow needs. These forecasts will enable you to initiate discussions with your lenders and other financial partners to negotiate payment holidays, new financing or equity injections.

In the context of the current crisis, it is also recommended that businesses take full advantage of the government assistance programs being offered. Mr. Bourque stresses the importance of wage subsidies for businesses that have been affected by the COVID-19 pandemic.

“Operational efficiency is an approach that will save a company in the medium term,” he explains. “In the short term, you need to address the balance sheet, obtain subsidies or capital payment holidays and reduce costs to maximize cash flow and ensure that changes can be made within the company.”

2. Review your cost structure

The next step is to review the company’s cost structure based on sales projections.

This is the time to examine fixed and indirect costs, such as marketing and administrative expenses and even certain research and development activities, which tend to increase year over year. While these costs might have been justifiable when things were going well and the company had a certain level of activity, they are worth reviewing to better reflect the company’s current situation and new strategic directions.

“These expenses are helpful, but now is the time to ask whether they are necessary,” says Mr. Bourque. “These cuts need to be made strategically to position the business for a future recovery.”

It is also important to review production costs to ensure they are competitive. Some, such as purchasing raw materials, will be dependent on the company’s level of sales, while others, such as labour, will be somewhat variable.

When business is going well, you don’t look at the costs; it’s human nature to only look at costs in a crisis situation.

Mr. Bourque also notes that many executives do not have a very good understanding of their costs, which can create problems when the company is in trouble.

“When business is going well, you don’t look at the costs; it’s human nature to only look at costs in a crisis situation,” he says.

3. Make a financial and operational diagnosis

Next, you need to examine the company’s financial and operational health.

This involves performing an in depth review of the company’s results to understand the trends that emerge. Are margins decreasing over time? If so, why? Were you too aggressive on pricing? Was procurement mismanaged? Was there a problem at a plant or in a store?

The problems that led to the difficulties cannot be solved unless they are properly identified.

Mr. Bourque stresses the importance of having good support at this stage of the process. “It’s good to sit down with a professional or a team of professionals. They have a host of analytical tools that can help target solutions,” he explains.

“It’s not so much the price of the process, but rather the capabilities and experience of the teams that are crucial. Supporting a struggling business is not something you can improvise. It takes skilled teams with advanced processes.”

Mr. Bourque gives the example of a retail business: “The best way to reduce the real estate footprint and cut costs is to rely on data. You need to look at the performance indicators for the sector. What is the occupancy cost? The level of traffic in store? The average amount spent per customer? Sales per square foot? This analysis will help you establish which stores are the most and least efficient. Not everyone has the analytical skills to identify trends.”

It’s also important to be realistic when setting objectives. “Reducing costs is easy, but improving sales is far more challenging. It’s hard to reverse a decline in sales, to get out of a trend,” he says.

These steps should help you identify what actions you need to take to get your business back on track.

What to do in case of insolvency?

One of the most difficult experiences an entrepreneur can face is a default on payment or cash shortfall. Insolvency is when a company is unable to pay its bills and other expenses, or when the value of its debt exceeds the value of its assets.

In Canada, insolvency proceedings are governed primarily by the Bankruptcy and Insolvency Act (BIA) and, for larger reorganizations, by the Companies’ Creditors Arrangement Act (CCAA).

In addition to providing for the settlement of debts for which the partial or total write-off will create equity, these two Acts also enable companies to restructure their capital to make room for new investors.

For the vast majority of companies, restructuring will be governed by the BIA. In this highly codified process, the insolvent company can submit a proposal to its creditors to restructure.

“I don’t know of any entrepreneur who is happy or proud to do this,” says Bourque. “But these laws exist. They can help accelerate the recovery from a crisis. A good example is the car manufacturer GM, which became very profitable after a restructuring, as did Air Canada.”

“You have to see it as an opportunity. You have to make sure you do it correctly, quickly and efficiently,” says Bourque. “What hurts the most is when it goes on too long; it makes employees and suppliers feel insecure, and customers wonder whether they will be able to buy from you.”

Although many entrepreneurs lose control of their business following insolvency, some remain in charge by working with their financial partners.

“Those supporting the company need to be kept in the loop—employees, suppliers and financial partners. The most important thing is often the quality of stakeholder relationships,” Bourque says.

“All the entrepreneurs we have helped at BDC get through difficult times have told us that they have learned a lot and come out of it better entrepreneurs,” Leduc says.

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