Founder: Turnaround Talk
In ancient Greece, people would travel from far and wide to visit the oracle of Delphi. After offering a sacrifice, the oracle would take a look into their future and tell them what lay ahead for them. This practice was replicated in ancient Rome where priests would read the entrails of geese or analyse the flight of birds to achieve a similar outcome; holy men in other eastern countries would read tea leaves. Fortune telling (or risk analysis as we know it today) has been around since the dawn of time.
Risk analysis has become a lot more refined than the mambo jumbo of fortune telling or visiting an oracle. Forecasts are necessary in the business world and risk analysis is done of the back of careful research that is driven by data. And even this can sometimes be wrong.
South Africa is facing a period of tough economic conditions. This is been driven by rising inflation, an energy crisis that has no resolution, and global concerns about an impending economic recession that will be the biggest since the 2008 Global Financial Crisis.
These headwinds are creating a perfect storm for another year of financial distress. What industries will be impacted the most?
Under siege
According to statistics released by Statistics South Africa in January, there were more liquidations in December 2022 (159 liquidations) then there were in December 2021 (122 liquidations).
This is indicative of the tough economic conditions that are driving the market. In December 2021, we were only coming out of a sustained period of lockdown where companies were facing deep financial distress. This should have changed in 2022 as the market started to return to normal.
If we look at the year as a whole, there were 1 907 liquidations recorded between January and December 2022. There was a slight improvement over the same period in 2021 where there were 1 932 liquidations between January and December 2021.
However, this change was not drastic enough to say that your risk analysis will change in any way. The market is still driven by risk as opposed to opportunities. Another factor that needs to be taken into consideration is that last year was our worst year of loadshedding on record. The rhetoric from Eskom points to this being the same for 2022.
Photo By: Stats SA
Industries under pressure
Two industries stood head and shoulders above the rest when it comes to distress. Once again, the nature of the industries is indicative of consumer pressure.
The financing, insurance, real estate, business services sector saw the most liquidations (55). This was followed by the trade, catering and accommodation (32). In an environment where consumer spending is under pressure, the first item to be struck off the budget is insurance and financial advice. Consulting comes under pressure as companies move this function in-house and media advertising takes a massive knock.
Then comes travel and events. Holidays become less frequent and corporate events get scaled down as cost cutting is implemented.
What does risk analysis look like for companies that are in these industries? What is their risk analysis outlook for a 5 year or 10 year period?
Much of the same
The key question that needs to be answered is whether the liquidations that were experienced over past two years were abnormally high. This will play an important role in risk analysis.
Stats SA provides information from 2016. The liquidations over a seven year period were:
- 2016 – 1 934 liquidations;
- 2017 – 1 868 liquidations;
- 2018 – 1 845 liquidations;
- 2019 – 2 042 liquidations;
- 2020 – 2 035 liquidations;
- 2021 – 1 932 liquidations; and
- 2022 – 1 907 liquidations.
Before we look at the stats, it must be pointed out that 2019 and 2020 were abnormally high years because of Covid. The Pandemic broke out in 2019 and spread throughout 2020. The adjustment to new trading conditions as well as import/export restrictions placed many companies into financial distress.
Taking these two years out of the analysis. We see that there is only a variation of about 60 liquidations per year between 2016 – 2018, and 2021 – 2022. Is this enough to say that the trading conditions has deteriorated significantly? Id argue that the trend shows that we have been facing much of the same trading challenges over a seven year period.
Photo By: Stats SA
The common denominator in all of this is loadshedding. Statistics show that was we move up levels in the loadshedding spectrum, an average of R500 million/day is lost. In terms of risk analysis, this is a massive risk.
Loadshedding data from January 2015 to March 2020 shows that there were no days lost to loadshedding in 2016 or 2017. However, an estimated 5.8 days were lost in 2018, an estimated 22.2 days were lost in 2019 and an estimated 24 days were lost in 2020 to loadshedding.
The country broke records in 2121 with an estimated 48.5 days lost to loadshedding. This was blown out of the water in 2022 where we lost almost 134 days to loadshedding.
As you can imagine, this has a significant impact on all businesses who have to invest in alternative power sources to counter this. Businesses that cannot afford these alternatives have no other option but closing down.
Where to from here?
So, how do distressed companies try to save their businesses and avoid liquidation? What do they include in their risk analysis?
If there is a reasonable prospect of saving their business, the following is vital:
- An independent business review is a good place to start. Not only does it give you a 360° view of your company, but it will also allow you to find out where your current operational inefficiencies are, what are the challenges that your company is facing, and how you can address these challenges in the best way;
- Cashflow management will be key during this time. Companies need to sit with experienced turnaround professionals who will be able to guide them on how to improve their cashflow management. This may require some capital investment, but it will allow you to automate some company processes to improve efficiencies;
- Finally, change management may be necessary. This may include looking at diversifying the company’s operating model or changing it to adapt to changing market conditions.
These are basic steps and cannot be considered as proper advice. Distressed companies should always sit with a turnaround professional who are qualified to assess and make recommendations regarding saving their businesses. They can also play an important role in risk analysis and risk forecasting.
In December, Turnaround Talk published an article by Sandra Beswick which discussed how South Africa is a liquidation nation. She added that we need to move beyond this and become a nation which saves distressed companies.
In the end, there will be an increased need for turnaround professionals to consult with companies on an ongoing basis, not only when they face financial distress. While early intervention may not completely avoid financial distress, it can be an effective way to manage financial distress and increase the number of companies that show a reasonable prospect of exiting business rescue. We cannot continue to be a country where liquidations are the only option left to some companies. Risk analysis is just another hat turnaround professionals will be expected to wear.
