So far in our series of blogs about corporate insolvency in Ireland, we’ve focused largely on the relationship between insolvency and the law, covering the formal procedures available for aiding and abetting company rescue, and then winding up orders and company liquidations.
But as experienced corporate restructuring specialists, one thing we always emphasise to clients who find themselves in financial difficulties is this – the chances of turning your fortunes around increase exponentially if you take action long before court-appointed officials get involved.
Formal insolvency procedures are the final backstop in place for companies that have already exhausted other avenues for revitalising their fortunes. While processes like Examinership, Schemes of Arrangement and SCARPs are explicitly intended to support financial and perhaps operational restructuring, the heavy lifting of turnaround management can and should be attempted before these become necessary – before the business officially becomes insolvent, in fact.
From our perspective, success in turning an ailing business around depends on two key principles – identifying the problem early, and taking the appropriate steps to restructure.
Heeding the warning signs
Whatever walk of life you are talking about, addressing a problem early helps to limit damage and, hopefully, keep the fix small and manageable. But as effective and near-universal as this approach is, it depends on early detection.
There are a range of good reasons why businesses should always exercise robust financial governance. One of them is to be able to spot concerning trends before they become something serious.
There are three major ‘tells’ that indicate a business may be on the slippery slope towards insolvency:
- Cash flow problems, or struggling to find the cash resources to pay bills as and when they are due.
- An imbalanced balance sheet, where total liabilities creep towards outweighing the total assets held by a company.
- High gearing ratio, or levels of debt that are disproportionately high compared to equity.
While none of these make insolvency a foregone conclusion, they are signs that the financial health of your business could be improved. Aside from potentially saving you a lot more trouble further down the line, acting to reorganise and strengthen your financial management can only be a good thing for overall business performance.
Turnaround strategy
The earlier you act, the more likely you are to avoid the need for formal insolvency procedures. And that means keeping control. Formal insolvency procedures are highly structured with lots of rules to follow. You lose the autonomy to do things your own way. And while many insolvency mechanisms aim at keeping a struggling business open, the overarching priority is satisfying creditors.
That doesn’t mean your approach to turning your fortunes around shouldn’t be structured and strategic. It’s just that you have more freedom to set the terms. The priority at this stage is fixing your cash flow, restructuring your debt liabilities or whatever you need to get back on an even keel. That takes a strategic approach for sure. You have to understand financial performance in a holistic sense, and know what levers to pull to get the desired outcome.
The need for a strategic focus is another key reason to seek advice from restructuring specialists well before insolvency becomes a reality. Get in touch with the Xeinadin Corporate Restructuring team to start the ball rolling on a better future.
