Is your business a 'zombie' risk?
It is usually more painful for a business to emerge from a recession than it is going into one.
Anyone who has run a marathon will tell you that the last 4km are way more painful than the first 38km as the body has, by that stage, exhausted all its reserves.
Similarly, businesses that have endured the past few years of economic hardship and hunkered down through the tough times may well have exhausted themselves, finding it difficult to re-energise and launch into the next upward cycle.
In the UK, the phrase “zombie companies” has been coined to describe businesses that have cut overheads to the bone, shrunk inwardly and have just held on to their particular patch of the market – taking no risks and not venturing out of their safety zone.
The problem is that such businesses will eventually lose market share to those who are less risk averse. As economic times improve, businesses must be ready to take advantage of opportunities and avoid remaining in that “zombie zone”.
The opportunities for growth present different challenges from simply hanging on for survival.
The basic factors needed to be ready for those opportunities are:
Cashflow is the lifeblood of any business. If you are only going to get one thing right, this is it. An essential report in any board pack is the 12-week rolling cashflow forecast showing the peaks and troughs in available funds.
By having advance warning of an impending cash shortage, management can take actions early to rectify the situation.
Now is the time to be talking to your bankers about your cash requirements to ensure that when the big push for new business is required, you can fund your trading activities.
In addition, start re-negotiating trade terms with your suppliers, who may be prepared to relax their existing conditions in the interests of more business with you. If you do not ask, you will not receive.
Otherwise known as gearing, it is important the proper capital structure is in place and that business activities can adequately service loans.
The prevailing low rates of interest will inevitably rise in the future and businesses should foresee such rises in advance, rather than being caught short with a failure to service debt and meet banking covenants.
The quality of assets is probably the most important factor in whether a business will succeed or fail. The directors should be reviewing their balance sheet critically and be prepared to divest assets that will not meet the required rate of return in the future.
There is little place for sentiment in getting the business up to the fitness level required to make it through the early recovery stages.
If an asset is not performing it needs to be removed, preferably yielding up cash to be used more effectively elsewhere in the business or stemming the outflow of cash.
If a business consistently loses money, it will not represent a sustainable proposition. The importance of setting realistic budgets and measuring actual performance against those budgets cannot be over-emphasised.
Regular periodic reporting is essential so that management knows precisely where the business is making money and where it is not. Without regular, quality financial analysis the business will be in jeopardy – if it is not measured it cannot be managed.
These are just a few factors for business owners and managers to consider in an economic recovery. Managing these areas well will ensure a business avoids the “zombie zone.”
Gareth Hoole is a partner and receivership specialist at Staples Rodway