The mining and manufacturing industry in South Africa has been struggling. The challenges of the 2019 financial year were conquered and the prospective opportunities of 2020 were exciting and motivating until it happened – a global economic crash attributed to an uncontrollable pandemic. Businesses in various sectors are now facing situations of distress but with the right know-how and support these situations can be managed.
Gideon Slabbert, Managing Director of Turnaround Rescue Solutions (TRS), provides some insight into the actions businesses need to take to manage current situations. He has been involved in business turnaround in the manufacturing industry for quite some time and understands the dynamics of an engineering services company, whether it be an SMME or large Corporate. TRS has also developed a risk assessment (downloadable from their website) designed for business leaders to ensure that a proper framework is established to guide their decision making.
A crucial first step in managing a business in distress is the execution of a risk assessment concerning ISO 9001:2015. This should happen at board level to develop an action plan that will allow the business to implement strategies countering the effects of an external influence. Internal influences are equally as important and reckless trading can be a serious concern.
The Companies Act 71 of 2008 provides a definition of reckless trading. It stipulates that insolvent trading could result in personal prosecution of the board if reckless trading is proven by an affected party. The insolvent trading mentioned is a situation in which a company’s liabilities exceed its assets (market value). Acts of insolvency include any action in the form of debt repayment negotiation, extended payment terms, or debt avoidance.
With all the different players involved in a business it is important to understand the individual actions that can and need to be taken by each.
Shareholding actions: The owners of securities are entitled to vote on special resolutions of significant transactions that include asset disposal and shareholding structure changes and any other matter as stipulated in the MOI.
Director actions: Directors of the business are the appointed officers employed to drive the business and ensure proper governance and compliance. A Memorandum of Incorporation depicts the authority and guidelines of decision making. Business leaders are often complacent in ensuring these documents. When facing Board conflict, neither the directors nor the shareholders can pass a resolution, resulting in the possible unnecessary wind-up of the company. Make sure an MOI is drafted for your company and ensure specific attention is given to the voting and dispute resolution policies.
Financial actions: Cash is the leading indicator when facing financial distress. As management, the debtor’s collection report must be accurate, and every invoice payment date and goods received must be communicated. Debtor’s insurance can be helpful to protect the business and avoid excessive irrecoverable debts. Ensure that a legal professional drafts the business credit terms of sale.
The same applies to the creditors listing report. It often occurs that goods received notes aren’t booked into the system. Make sure that your accounting division scrutinises every invoice received.
Ensure that the appointed public officer receives a SARS statement of account so that the management is aware of the business’s position with SARS and that all declarations are filed and paid over to SARS. The same applies to all provident and pension funds; verify that all payments due have been made by the business.
Credit applications are often neglected and have a significant binding effect on the business. Ensure that the accounting department has a valid copy of all credit/financing applications. Credit applications often include surety agreements that are signed by the directors. It is important to know where surety or cession of assets has been granted.
Scrutinise the bank statements and ensure that all subscriptions and debit orders being deducted from the bank account have been evaluated. Usually, these transactions have a 30-day waiting period and require swift cancellation action. Develop a sixteen-week cashflow statement, detailing all income and expenses. By doing this, the cash flow planning will highlight where potential issues will be and it will highlight the magnitude of the issues to the board.
Sales Management actions: When facing business distress, Sales Management is one of the most crucial elements that should simultaneously be monitored with Financial and Operational Management. Post-COVID-19, management should execute a situational analysis of the sales pipeline, monitoring the status of pending vs open quotations, new purchase orders and late purchase orders.
Every Sales Manager should make it his priority to contact all active customers and assess spending potential as well as payment ability. During this assessment, the Sales Team should scout for new opportunities and identify new customers as a result of the COVID-19 pandemic.
Procurement actions: Business procurement practices are crucial to a successful value chain. The timely delivery of goods at the right price and the right quality support the production team in ensuring efficient production of goods. When in financial distress, raw materials are often purchased on a cash basis. Businesses must avoid transferring cash if they are not certain that they will receive goods as specified on the original purchase order. When using new suppliers, ensure that suppliers are audited and their ability to deliver goods have been evaluated.
Operational Management actions: When in distress, management needs to evaluate their input-profit balance. Which orders can be delivered with the least amount of input but provide the most profit. Deliveries need to be negotiated with customers to avoid bottleneck situations. Implement measures or Key-Performance-Indicators that enhance the efficient monitoring of staff and machines. Ensure that work-shifts are optimised, and overtime is minimised by implementing performance bonuses. Evaluate your assets and sell obsolete equipment in exchange for plant upgrades. Execute planned maintenance strategies when the opportunity presents itself as unplanned machine breakdowns can be costly and detrimental to the business.
Human Resource Management actions: The assessment of the employment practices of a distressed venture is crucial. This is usually one of the first areas where optimisation can be implemented by assessing the skills and capabilities of all staff and benchmarking their remuneration to the market. Often, businesses employ long service staff that are not necessarily as efficient as they were. Staff reshuffling is a very effective way of generating new labour efficiency.
In conclusion, business leaders facing financial distress are urged to implement a proactive distress strategy. Business Rescue is a mechanism that can provide companies and closed corporations with a moratorium on all assets while restructuring the business affairs. The success of such proceedings is dependent on the board’s ability to welcome independent intervention in abnormal circumstances.
This is the viewpoint of Gideon Slabbert Business Rescue & Turnaround Practitioner www.turnaroundrescue.co.za