We are all familiar with the boiled frog scenario. Just like the frog, business owners sometimes cannot react to changes that happen gradually. Unfortunately, the reality is, if warning signs of financial distress are ignored, a business can end up just like the frog. The business, which the owner worked so hard to build, will die a slow death that they won’t see coming until it’s too late.
The difficulty for a business experiencing concerns is that the owner often needs help knowing what to do and when is the right time to make the call to speak to someone about the issues.
In these situations, a Voluntary Administration (VA) may be an effective way for a company to deal with this financial difficulty to avoid liquidation.
What is a Voluntary Administration?
A voluntary administration (VA) is a process in which an administrator is appointed to take control of a company’s affairs with the aim of restructuring the company or selling its assets to maximise returns to creditors.
A Voluntary administration is a process designed to help a financially distressed company get back on track, giving it the time needed to restructure its operations and finances. This can involve renegotiating contracts, selling assets, or downsizing the workforce.
What are the warning signs?
Whether you are a business owner or a professional advisor of a business, it is important to be aware of the warning signs of distress and be able to identify the signs of when a Voluntary Administration may be beneficial.
Here are some of the signs that indicate a company may need to consider a VA:
- Good underlying business with some financial issues that need addressing. Ongoing losses: If a company has been experiencing ongoing losses and is unable to pay its debts as they fall due.
- Cash flow problems: If a company is struggling to meet its cash flow obligations, including paying suppliers and employees.
- Legal action by creditors: If a company is facing legal action by creditors, including demands for payment or winding-up petitions.
- Lack of available funding: If a company is unable to obtain funding from lenders or investors to address its financial difficulties.
- Poor financial performance: If a company’s financial performance has been consistently poor and shows no signs of improvement.
Why a Voluntary Administration?
A Voluntary Administration gives the company the opportunity to improve its financial position and hopefully become profitable again. In addition, this gives creditors a better chance that they will be paid what they are owed.
Entering into Voluntary Administration should not be seen as the end of the road or as a sign of failure. Instead, it should be viewed as a proactive strategy to address financial difficulties. It can also make it easier to secure finance in the future.
Appointing a Voluntary Administrator allows the business owner to step back from the day-to-day events and let the advisor and other key influencers to help figure out what has changed, and what has gone wrong and come up with a solid plan that actually changes the way the business owner and the company is operating.
However, it is important to note that a Voluntary Administration may not always be the best solution for a struggling company, as it can have significant implications for all involved.
What can you do before it’s too late?
If the above warning signs are being experienced, taking action quickly before making any further decisions is important. At this point, it becomes beneficial to seek outside support from a specialised expert, such as a business advisor who knows how to help underperforming companies. Performance improvements can include cost-cutting and other operational initiatives combined with debt restructuring while those actions are taken.
Insolvency experts have specialised knowledge and experience in dealing with financial distress and insolvency. They can provide valuable insights and guidance to help you assess your options and make informed decisions to navigate complex situations.
No business is immune to some financial strain and stress. So, as a business owner, or an accountant, lawyer or financial advisor working with the business owner – be aware and help monitor the warning signs to ensure that business owners beat the odds and get the necessary specialised guidance to avoid falling victim to ‘boiling frog syndrome’?
If you are considering a VA or would like to discuss confidentially any issues your client may be facing, feel free to give us a call. Contact Antony Resnick at dVT Group at (02) 9633 3333 or by email firstname.lastname@example.org.
dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.