What happens when your business gets into financial distress? It’s not something many people want to think about, but at the same time you need to prepare for it. Companies fail more frequently than you might expect, with an average of 44,600 firms going bankrupt each quarter in the US, and 14% of UK businesses in significant financial difficulties.
There are a number of reasons why your company might experience this. Some industries are particularly susceptible to market changes, and are unable to take hits to their profit margins. Cash flow is another common issue, which can creep up if a large portion of your business’ assets are illiquid.
To avoid going under, your organization needs to have a solid plan for when the worst happens. Here’s what you need to bear in mind when the company is in financial distress in order to minimize the damage done:
One of the first things to do upon hitting financial distress is to consider restructuring. It’s unlikely the company will have got into this position without some fundamental issues with the way it runs, and the aim of restructuring should be to identify these weaknesses and eliminate them, while shoring up your strengths.
You might be surprised by what needs changing in your business. When Duran Inci - co-founder and COO of Optimum7 - restructured, he found that his firm’s issues included its training process and sales funnel. By reorganizing how these work, he was able to get the company on its feet again.
While restructuring ideally will have immediate benefits, you’ll also need to think long-term. Vivian Hairston Blade, member of the Forbes Coaches Council, points out that you’ll need to make quick decisions in order to retain your top talent. This can be a particular challenge, as morale will often be hit by a restructure.
Make sure responsibilities don’t get neglected
The directors of your business all have certain responsibilities once the organization enters financial distress. This doesn’t mean you can no longer trade, but directors do have duties of care and loyalty that mean they have to be careful about the steps they take. On a basic level, this means not abandoning the company; directors must keep the best interests of the organization, its staff and its creditors in mind.
If you or any other directors are thinking about resigning, it’s generally not a good idea to do so. It probably doesn’t insulate you from any liability, and in fact can open you up to lawsuits for breaching fiduciary duties. The best thing to do is to try to get the company out of financial trouble.
Depending on where your company is based, you might have different responsibilities and legal elements to consider. Just within the US, you’ll need to look at different state legislation. Around the world, laws are even more different, and your directors might have different duties to those in America.
For example, in the UK, the Institute of Chartered Accountants in England and Wales notes that directors may be better off ceasing trading if their companies go into financial distress. Otherwise, they might end up being liable for wrongful trading if they don’t take every possible step to minimize loss to creditors.