Expand your toolkit to deal with current disruptive forces

While the State of the Nation Address, and the 2022 Budget Speech, painted a picture of a country facing harsh economic times with pressure being applied in all directions, there is a glimmer of hope that the rhetoric is changing within the ANC to focus on the future drivers of growth. President Cyril Ramaphosa has made it clear, there needs to be increased participation from the private sector if we are going to create jobs and diversify our economy.

The problem with this is that we are seeing many companies face the economic pressures discussed above with work within the business rescue and business turnaround space not particularly difficult to find. If we are going to grow South Africa, we need to do it with financially sound companies that are agile enough to respond to the current demands of the market. this can only be done if BRPs expand their toolkit and look at how they can improve the basics of their business to help companies overcome their distress.

Discover your current position
The first step is to have a look at the current position the distressed company is in and what is influencing the market around it.

Analysis has to be done on every area of the business to identify the real cause of the problem. This is key to a success turnaround because BRPs need to make decisions based on facts so that they can choose the right turnaround strategy. Your best chance for a successful business turnaround starts with your ability to identify, measure, and evaluating the key performance indicators in different parts of your business.

An important departure point for any BRP or turnaround professional is to ascertain whether there is a business to rescue. This has moved beyond the damaged caused by mismanagement and financial irregularities and looks at the company’s business model in relation to the current market conditions that the company operates in. Take CNA as an example; in the 1980s and 1990s, the company had a great business model. But with the growth of the internet, and companies such as Waltons muscling in on key markets such as schools, CNA’s business model became obsolete. The company’s inability to migrate towards an omnichannel business led to the company’s demise.

BRPs are looking for businesses that have the potential for future growth, development and profitability. Is the product or service near the end of its life cycle? Consider the CNA example above.

If the answer is no, go back to the drawing board. Start over. Because no matter how great somebody feels their product is, if no one needs it/wants it/buys it, you don’t have a business. Be completely objective and prepared to look at the business through new eyes, looking for new ways of doing business.

While evaluating the business, it is important to identify essential and important issues for the business’s survival like internal strengths and weaknesses, as well as the business’s external threats and opportunities. 

Determine solvency
Solvency and liquidity checks are important for any business. If we honestly had to apply these tests to State Owned Enterprises (and deliver a truthful outcome), hoe many of these entities would have survived the past two years? How many will survive in the future? This is why Ramaphosa is calling for diversification.

While this is an intensive, and emotionally stressful process, it is a necessary one. The article points out that these questions will give you a good idea of where your business stands at this point, and you may need to get some legal or professional advice.  It’s important to know that you are legally required to present accounts to show a true and fair picture of the business, and if the business is insolvent you must act to maximize creditor’s interests.

Here is a basic test that you can use to determine the solvency of a business:

• The Balance sheet test: does the distressed company owe more to creditors than what the business is actually worth? Are the business’s assets exceeded by its liabilities?
• The Cash flow test: can the distressed business pay its debts when payments become due? If the business can’t pay expenses, employees, creditors, or SARS, then the business could be insolvent. If a creditor has obtained a judgment against either the business, partnership, or an individual, this may demonstrate the businesses, individual or partnership may be insolvent, and the creditor may petition to issue bankruptcy proceedings;
• Adequate Financing and Timing. Any business on the recovery path needs time.  Success doesn’t happen overnight. It’s also critical that you are able to generate sufficient cash to survive in the short-term, while a turnaround strategy is being formulated;
• Motivation. You must be motivated, have a passion for success, and will do whatever it takes to achieve your goals. In many cases, the owner has lost interest, desire, and drive due to the long period of financial pressure; and
• Execution of the turnaround plan. Success is won or lost through execution of the turnaround plan. Many business owners get past the crisis, soothe their creditors, restore a positive cash flow, and then fail to execute the turnaround plan and subsequently the wheels come off the wagon. Don’t let this happen to you! Work your plan every minute of every day. And stay accountable to your plan.

Root cause analysis
This could very easily be names: rot cause analysis. Simply put, what are the factors that have led to the company’s financial distress?

The article points out that with little or no margin for error, no time to waste, and few second chances, sufficient and accurate analysis have to be done swiftly and on every area of the business to identify the real cause of the problem. This is key to a success turnaround because you have to make decisions based on facts, so you can choose the right turnaround strategy.

The success of your turnaround strategy starts will depend on your ability to identify, measure, and evaluate your business key success factors in different parts of your business.

The article adds that most reasons for business success, and business failure policies can be found within these 6 areas:

• money;
• management;
• marketing and sales;
• people (the businesses‘ skill set);
• product and service; and
• process and systems.

There are also external conditions that are placing companies into distress. The current external conditions include:

• the impact of the Covid-19 Pandemic;
• the global supply chain crisis;
• diversification of suppliers;
• digitisation and the movement towards an omnichannel business; and
• digitisation and its role in making business models obsolete.

External risks
Lets consider the external factors and apply them to SAA and CNA. Ignore the well established, and extensively reported, challenges that these companies faced from a mismanagement point of view.

SAA’s external problems were simple:

• in 2020, the world was in lockdown and flights were grounded. While this opened up in 2021, SAA was in no position to sufficiently recover from the 2020 economic blow to simply line their aircrafts up on runways in 2021. As a result of Covid, the company had to decrease the size of its fleet, decrease the size of its workforce, and change its serviceable routes. Covid forced SAA into looking towards a significantly streamlined model.
• the global supply chain crisis saw many airlines diversify their business model and retrofit some of their aircrafts into cargo planes. SAA did not have this luxury.

Before the news of the mudslinging that was going on behind closed doors between outgoing CEO (Benjamin Trisk) and the CNA board, it was apparent that the company was impacted the most by the changing external environment:

• Waltons changed their business model and focused on direct supply to schools and Universities. Supplying a bespoke solution at the source cut out the need to travel to multiple CNA stores to fill a stationary list;
• Pricing. Stores such as Pick n Pay, Checkers and Makro offered the same product as CNA at a significantly lower price. The fact that you could purchase this while doing your grocery shopping was also a convenience CNA could not beat.

Ster Kinakor went into business rescue last year. While the company is seemingly recovering from its financial distress. Research needs to be done on the following risk factors:

• The Pandemic has fundamentally changed the way we consume entertainment. Downloads from the internet, DSTV’s Box Office Service, and streaming services such as Netflix and Showmax (which offers significant variety) can – and will – impact Ster Kinekor’s future position;
• Streaming services such as Netflix have big budgets and are producing unique content which could compete with Ster Kinekor’s business in the future.

DSTV’s future position is not guaranteed. Streaming services are muscling in on the satellite TV business model globally. Many companies such as HBO, CNBC, Disney and Fox are launching their own streaming services ringfencing content in the process. They are not selling on popular content such as Chicago PD, Dexter or House anymore because they want to attract audiences to their platforms. Disney+ (Disney’s streaming service) is launching in the Middle East and Africa (South Africa for the moment) in June 2022. Expect other US and British streaming services to follow suit as they look to beef up their audiences.

As we can see by the risk factors above; the initial discovery into the company’s distress is complicated and requires a lot of time, effort and specialised skills. Companies have to expand their survival toolkit, but this needs to take place alongside BRPs expanding their tool kit to fit in with the current disruptive forces.