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Free interactive tool: Calculate the probability of financial distress to your business within the next year…

Calculate the financial health of your business and determine the likelihood of financial distress using our online Z-score calculator…

Follow this link to calculate the financial fitness of your business and determine the probability of financial distress in the near future…

Use our interactive financial fitness calculator and determine the probability of financial distress in the near future.

Please note that the current benchmark is set for privately owned manufacturing companies, and is used for illustration purposes only.

We are however able to benchmark your business against industry norms, and provide you with a comprehensive financial analysis report, which will enable you to quantitatively drive your business growth and turnaround strategies. Please follow the below link for information on the benefits to your business.

Follow this link to calculate the financial fitness of your business and determine the probability of financial distress in the near future…

What is the Z-score?

  • In 1968 Edward Altman developed the Z-Score, to assess a business’s financial health and to predict the likelihood of financial distress. The Z-score use 5 popular financial ratios and coefficients to describe the likelihood that a business will experience financial distress within 1 year of the financial results used;
  • The Z-scores have gained acceptance by auditors, management accountants and courts;
  • Today this internationally accepted model is used in database systems for loan evaluation. The Z-score has an accuracy of approximately 85% and works best for manufacturing companies, but has limited use in evaluating financials in property companies;
  • Privately held manufacturing companies with a Z-score of more than 3 is classified as being in good shape and the likelihood of financial distress within the next year is considered slim;
  • Similarly, a Z-score of below 1.8 indicates that a company is likely to face financial distress within one year or less;

 

Case study: How Daimler approached their business turnaround to profitability

Daimler reported $6 billion loss for 1995 and needless to say Mr. Reuter was replaced by Mr. Jurgen Schrempp. Mr. Scrempp went about bringing Daimler back to profitability.

Credit: Jacques Nel (MBA, MSc)

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At the end of the 1800’s the development of the auto mobile brought opportunity to engineers and entrepreneurs. In 1900 more than 1500 companies were involved in the development of the auto mobile and by 1980 only a view dozen players in the market remained.

By 1990 the 3 big companies (Ford, General Motors and Chrysler) were responsible for 75% of all American car sales. Today 30 companies control world wide production. It is wide recognised that the auto mobile industry has been in the mature market phase for the last 50 years.

In 1980 Daimler was the leading manufacturing company in Europe, with a proud reputation of innovation and engineering capability. Mercedes Benz, which contributed 80% of its Daimler’s sales, was well respected in the luxury car market and a leader in this market segment.

The 1980’s provided Daimler with steady profits, but they did not have it all their way. Daimler was finding it increasingly more difficult to develop new car models (rising R&D costs and longer development cycles), competitors were quick to duplicate Daimler technology and the luxury car market (the fastest growing sector in the auto mobile market) was attractive more and more competitors.

So, what was Daimler to do?

Its CEO (Mr. Edzard Reuter) believed that the market for motor cars would decline and that the company had to become less dependent on Mercedes sales for its survival. The emergence new technologies and industries (such as microelectronics and information technology) was the opportunity he was looking for.

These new technologies could also provide Daimler with potential synergies and spin-offs in the auto mobile industry and help diversify Daimler’s business interest. Between 1985 and 1992 Mr. Reuter spend $6 billion in acquisitions and transformed Daimler into a conglomerate consisting of 36 companies run in 4 different business units.

The Daimler company was now involved in diverse businesses ranging from aerospace, transportation to white consumer goods, but Mr. Reuter’s diversification strategy was unsuccessful. Daimler profitability declined (reporting huge losses), shareholder value decreased and its share price fell to 60% of its pre-1980’s value.

So, what can we learn from the mistakes made by Mr. Reuter?

• Daimler moved away from its core focus (building high quality cars).
• Management control lacked as subsidiaries were allowed to make their own decisions
without the parent company influence.
• Lack of change management. Mr. Reuter was unclear about how these companies were to be incorporated into the Daimler structure and how these new technologies would form part of Daimler’s repositioning.
• Diversity and size of the portfolio of businesses. Within a relative small time frame
Daimler’s management were in charge of a very diverse portfolio of businesses with very
different clients and sales processes.
• Different customer groups and sales processes. It was easy to see who the end users would be for its Mercedes Benz vehicles, but selling passenger cars was very different from tendering for government contracts (aerospace) or selling microelectronic products.

Daimler reported $6 billion loss for 1995 and needless to say Mr. Reuter was replaced by Mr. Jurgen Schrempp. Mr. Scrempp went about bringing Daimler back to profitability.

• He divested (sold or closed) non profitable businesses (trimmed the group from 36 businesses to 24). Swept away divisional structures.
• Flattened the management structure.
• Re-established parent company control. Tightened control over subsidiaries (executive board had full control over restructuring).
• Refocused the business to its core focus.
• Transformed the company in a transport group consisting of air, rail, freight, buses and coaches and passenger cars.
• Improving shareholder value through profits.

In 1996 Daimler reported profits and was well on the road to recovery. Mr. Schrempp (as his predecessor) realized that Daimler needed to change. But unlike Mr. Reuter he stayed with his core focus and decided to look for niche pockets of opportunity downstream the
passenger car segment to grow Daimler. He wanted to be a part of the mass market but not enter into it.

He looked for segments within the passenger car market where customers wanted additional value and was willing to pay for it. Under his leadership he introduced the CLK, SLK and A-classes; Mercedes and increased Daimler’s profitability and market presence.

He was revered for his success within Daimler. So, why was Mr. Schrempp successful?

• He re-established focus within the Daimler group.
• He went back to core competencies.
• He tightened management control.
• He looked for unique opportunities within Daimler’s business sphere (new product introduction to existing customers).
• He set performance target for each business unit.

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Guard against cash-flow pressures

Credit: Jacques Nel (MBA, MSc)

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Good cash flow management can mean the difference between business survival and business failure. This guide looks at the key elements of cash flow management and will help protect the financial security of your business. It outlines the steps that you can take when dealing with your customers, suppliers and stakeholders to improve cash flow. It also highlights common cash flow problems and how to avoid them.

Cash versus profit

Profit is the difference between the total amount your business earns and all of its costs, over a given trading period. Cash flow (inflows and outflows) is the movement of cash into and out of your bank account. Good profits do not necessarily mean your business is healthy. Bad cash flow management can leave you cash strapped and fighting for survival.

Cash reserves

To trade effectively and be able to grow your business, you need to build up cash reserves by ensuring that the timing of cash movements puts you in an overall positive cash flow situation (inflows exceeding outflows). Income and expenditure cash flows rarely occur together (inflows often lag behind). You must aim must to speed up the inflows and slow down the outflows.

To improve everyday cash flow you can:

  • ask your customers to pay sooner;
  • chase debts promptly and firmly;
  • use factoring (obtain 3rd party advance on portion of invoice);
  • ask for extended credit terms with suppliers;
  • order less stock but more often;
  • lease rather than buy equipment;
  • improve profitability;
  • increasing borrowing (not to be used as long-term strategy);
  • putting more money into the business (not to be used as long-term strategy);
  • set up cash flow management systems (who are responsible for tracking cash flow? How regular should forecast be reviewed?);
  • arrange special terms with suppliers (30 day accounts, billed quarterly, etc.);
  • control cash outflows (switching suppliers if necessary, negotiating once-off purchases);
  • get accounting software to track cash flow and make forecasts;
  • use forecast to spot problems;
  • bank money the instant it comes in;
  • shop around for better deals that could reduce costs;
  • monitor the effectiveness of your marketing and modify it as necessary (cash inflows).

Cash flow problems and how to avoid them

No matter how effective your negotiations with customers and suppliers, poor business practices can put your cash flow at risk. Look out for:

  • Poor credit controls – failure to run credit checks on your customers is a high-risk strategy, especially if your debt collection is inefficient
  • Failure to fulfil your order – if you don’t deliver on time or to specification you won’t get paid. Implement systems to measure production efficiency and the quantity and quality of stock you hold and produce
  • Ineffective marketing – if your sales are stagnating or falling, revisit your marketing plan.
  • Inefficient ordering service – make it easy for your customers to do business with you. Use first class post and, where possible, accept orders over the telephone or Internet. Ensure catalogues and order forms are clear and easy to use.
  • Poor management accounting – keep an eye on key accounting ratios that will alert you to an impending cash flow crisis or prevent you from taking orders you can’t handle.
  • Inadequate supplier management – your suppliers may be overcharging, or taking too long to deliver. Create a supplier management system
  • Poor control of gross profits or overhead costs.

Cash flow forecasting

Cash flow forecasting is essential in managing your business’s cash flow effectively. It helps predict peaks and troughs in your cash balance, plan borrowing and predicts surpluses at a given time. Having a regular review of your cash flow forecast will enable you to:

  • see when problems are likely to occur and provide solutions in advance;
  • identify any potential cash shortfalls and take appropriate action;
  • ensure you have sufficient cash flow before you take on any major financial commitment.

The forecast is usually done for a year or quarter in advance (projected monthly or weekly). The forecast lists:

  • receipts (inflows – sales etc.);
  • payments (outflows – expenses etc.);
  • excess of receipts over payments – with negative figures shown in brackets;
  • opening bank balance;
  • closing bank balance.

Established businesses can combine historic sales (previous 12 months) with predicted growth to compile realistic forecast estimates. Forecast figures are based on sums that are due to be collected and paid out, and not on invoices actually sent and received. Adjust forecasts in line with long-term changes to actual performance or market trends, in light of your sales, purchases, staff costs and changes in legislation, interest rates and tax rates.

Finally, have a contingency plan, such as retaining a minimum amount of cash in the business in an interest-earning account, to meet short-term cash shortages.

To assist you in effectively managing your business’s cash flow invest in accounting software that makes planning and cash flow forecasting easy or contact a professional for assistance.

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When business performance falls short…

Practical focus areas to consider when your business is failing to perform…

by Hendrik van den Bergh
(originally published in the Hardware Retailer Issue 8, 2007)

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It has been said that entrepreneurs should follow their passion and that success will follow. But often the road to success is obscured by factors beyond our control. Mere passion and brute determination alone will not ensure business success.

It has to be reiterated that even the best formulated business strategies sometimes fail to bear fruit. When a businessman is faced with evident symptoms of a failing or stagnant business, it is worthwhile to consider the following:

Take control

“If it is not measured it can not be managed”. In most small businesses the span of control is most likely to expand and loose its effectiveness as the business grows due to increase in demand or when the business’s operational and financial structures change.

Growth can sometimes lead to the death of the business as it becomes enveloped by the load of menial, but important administrative tasks. When a business grows provision has to be made for the availability of additional cash flow as overheads and expenses increase.

Without a clear reflection on the true financial health of a business, is becomes difficult to assess and make informed decisions.

Action: Implement and maintain effective financial control and systems. This will not only support the decision making process and daily management of the business, but will assist in highlighting areas of loss, theft and unproductive operations.

Internal audit (Due diligence)

Conducting a business audit, may prove as an invaluable instrument to assess the current state of the business. It will present a snapshot of the business as a whole and all the functional areas at a particular junction.

The following aspects should be assessed in order to formulate effective strategies and implement corrective action for realignment:

  • Financial audit on the past business performance;
  • Human resource audit on the current skills and capacity;
  • Internal analysis of the businesses products and services;
  • Internal analysis of the management skills and capabilities;
  • Internal analysis of the manufacturing or marketing processes;
  • External analysis of the competitors and their product/service offerings;
  • External analysis of the competitions manufacturing or marketing processes and strategies;
  • Determine and assess internal and external factors that may have an adverse effect on the success of the business.

Maintain objectivity

It is essential that the business owner remains objective and unemotional in his/her approach during the assessment and implementation phases of the business audit and turnaround strategies. It is advisable to source the services of professions, or to consult the businesses auditors where objective and sound advice is required.

Consolidate

The most effective short term strategy, besides increasing turnover and improving profitability, would be to take effective control over the outstanding debtors’ book of the business. Collecting outstanding debts could release much wanted cash into the business that could be utilized for the implementation of the turnaround plan and subsequent actions. To improve cash flow, give discounts for early payments, charge interest for late payments and obtain the services of professionals to speed-up debt collection.

It is just as important to manage the outflow of cash in the business, and limit unnecessary exposure to high levels of trade credit. A good rule would be to limit unnecessary expenses, postpone or renegotiate creditor payments and identify more cost competitive suppliers.

Turnaround objectives

During the assessment and strategic realignment of the business, it is advisable to identify areas of possible improvement where the following can be implemented. It must be highlighted that the following should be done within the framework of the new business strategy and budgetary frameworks/constraints;

  • Cut unnecessary or luxury cost items;
  • Reduce unnecessary or unproductive assets;
  • Increase turnover and profitability;
  • Improve processes / adapt and increase marketing initiatives;
  • Communicate to all the stakeholders and create buy-in.

Communicate

Communication is essential to ensure effective implementation of chosen strategies. It is advisable to always communicate clearly and openly with stakeholders, especially your bank and creditors with regard to possible and current financial and operational obstacles that you may encounter. Useful information may also be gathered from suppliers and customer that may improve current operations or future strategies of the business.

Realign and reassign

Once you have concluded the analysis of your business, it is important to formulate and define your intentions clearly. This could be done in the form of an adjusted business plan or turnaround strategy.

Realign the management and support structures in the business, adjust your product/service offerings, implement new external marketing initiatives, and reallocate financial, human resource, and capital resources to ensure that the necessary capacity and support is in place to implement the new business plan/strategy.

Focus

A well formulated strategy has no value if not implemented effectively. It is therefore essential to identify and establish clear, measurable and attainable short and medium term goals to facilitate the change process. Remember that any movement in a positive direction, doesn’t matter how insignificant it may seem, is better than inactivity or downward trend.

These changes may be in the form of increased turnover, greater profit margins, increased marketing exposure or even effective cost savings initiatives. Mapping and recording implementations are essential to measure the effectiveness of a new strategy.

Consult experts

It is often that small changes in business operations could have profound effects on the future performance. Thorough analysis and objective advice may highlight areas of concern, and may not always require huge financial or structural changes to get the operations realigned.

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The analysis begins…

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Thank you for joining our new interactive discussion platform!

We appreciate the continued support from our client companies, and have therefore decided to create an interactive discussion platform relating to the following topics which is becoming more relevant to our client companies:

Business growth challenges and turnaround strategies;

Business rescue (Chapter 6), liquidation and debt management strategies; and

Legal rights and challenges facing the business owner in South-Africa.

We appreciate client participation, suggestions, and feedback.

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