Business Reconstruction

Geoffrey Ellison is a registered liquidator – but don’t stop reading there. That’s not his primary objective – to a certain extent, he says, “if a business fails after I’ve been introduced to them, then I feel I’ve failed”. He specialises in reconstruction, working in particular with small-business owners. In addition to his day job with chartered accountants and business advisors Bentleys MRI, Ellison lectures on corporate structures and taxation for small business support organisations.

“The nature of small business,” says Ellison, “is to fight the bush fire every day. So I always say to the MDs: what happens when the rubber band runs out?”

The key to reconstruction or simply avoiding business failure, according to Ellison, is working ON your business rather than simply in it. That means being aware of the main reasons why businesses fail, and ensuring that you have your business assessed regularly by an impartial advisor who will always be objective about your chances.
The main reasons for small business failure include:

Lack of business or management skills.
Under capitalisation.
Lack of financial planning.
Inventory problems tying up capital.
Inadequate sales.
Inability to keep up with technology.
Industry downturns.
Inability to get good staff.
Lack of product development.
Poor promotion.
Premature expansion.
Poor location.
Uninsured disasters.

Lots of scope to fail, you might think, but in the main the businesses that come to Ellison (voluntarily or otherwise) have usually ignored one or all of these four key considerations:

Ask for Help

“It’s a lonely world for small business,” says Ellison. “They tend not to seek help. They’re wary of giving the impression they can’t manage, especially if they’ve mortgaged the family home to get the working capital.” He adds, “When you suggest that they need professional advisors or mentors, they say they can’t afford it, when in reality they can’t afford to do without it.”

Be Organised

Get some software that is easy to operate, Ellison says, because you need a decent set of monthly figures. “You can then start to look at your key performance indicators,” he explains, “whether it’s your cash position or the number of returns, whatever is it that tells you truthfully how you’re going.” If you’re not a proficient software user, get someone in to do it for you. Don’t waste your time learning to operate software when what you need is the output.

Another essential is well-organised administrative processes and systems. As Ellison says, “Not only will this make your business run better now but it will simplify the due diligence process when you’re ready to sell.”

Cash is King

Part of the culture of small business, says Ellison, is to “borrow” from the Tax Office during hard times or between tax payments and think that you can catch up later. It’s a dangerous strategy, he counsels, as is simply assuming that a burgeoning customer list means you are doing well. Orders are not revenue! “Look at your bad payers,” Ellison advises, “they’re costing you money. And don’t accept slow payment from large corporations. Some of them got that way by managing their cash flow to the detriment of smaller players. Don’t let them get away with it.”

“Failing to Plan is Planning to Fail”

Don’t treat business planning as a window-dressing exercise only designed to impress a bank manager. You need a plan for your business – or don’t bother to start up. You can’t say it often enough – but too many MDs are either timid about planning – “We’re too small to need a detailed plan – we all know what we’re doing” – or arrogant “It’s all in my head so why bother writing it all down for someone else to read.”

Ellison explains that by helping companies view their business objectively they can identify the true weak points of the operation. “I’ve had people come and ask me to sell their business,” he says, “when really all they want is some fresh thinking. Once we do the analysis and show them what happens when you start to improve sales, profitability and increase the value per order, we often find the request to sell goes away.”

Business reconstruction techniques can be the key to ensuring you never get to hear what Geoffrey Ellison knows about liquidation.

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Author: Sharon Pink
Date: 17 April 2003