Mr. Bourque also notes that many executives do not have a very good understanding of their costs, which can create problems when the company is in trouble.
“When business is going well, you don’t look at the costs; it’s human nature to only look at costs in a crisis situation,” he says.
3. Make a financial and operational diagnosis
Next, you need to examine the company’s financial and operational health.
This involves performing an in depth review of the company’s results to understand the trends that emerge. Are margins decreasing over time? If so, why? Were you too aggressive on pricing? Was procurement mismanaged? Was there a problem at a plant or in a store?
The problems that led to the difficulties cannot be solved unless they are properly identified.
Mr. Bourque stresses the importance of having good support at this stage of the process. “It’s good to sit down with a professional or a team of professionals. They have a host of analytical tools that can help target solutions,” he explains.
“It’s not so much the price of the process, but rather the capabilities and experience of the teams that are crucial. Supporting a struggling business is not something you can improvise. It takes skilled teams with advanced processes.”
Mr. Bourque gives the example of a retail business: “The best way to reduce the real estate footprint and cut costs is to rely on data. You need to look at the performance indicators for the sector. What is the occupancy cost? The level of traffic in store? The average amount spent per customer? Sales per square foot? This analysis will help you establish which stores are the most and least efficient. Not everyone has the analytical skills to identify trends.”
It’s also important to be realistic when setting objectives. “Reducing costs is easy, but improving sales is far more challenging. It’s hard to reverse a decline in sales, to get out of a trend,” he says.
These steps should help you identify what actions you need to take to get your business back on track.
What to do in case of insolvency?
One of the most difficult experiences an entrepreneur can face is a default on payment or cash shortfall. Insolvency is when a company is unable to pay its bills and other expenses, or when the value of its debt exceeds the value of its assets.
In Canada, insolvency proceedings are governed primarily by the Bankruptcy and Insolvency Act (BIA) and, for larger reorganizations, by the Companies’ Creditors Arrangement Act (CCAA).
In addition to providing for the settlement of debts for which the partial or total write-off will create equity, these two Acts also enable companies to restructure their capital to make room for new investors.
For the vast majority of companies, restructuring will be governed by the BIA. In this highly codified process, the insolvent company can submit a proposal to its creditors to restructure.
“I don’t know of any entrepreneur who is happy or proud to do this,” says Bourque. “But these laws exist. They can help accelerate the recovery from a crisis. A good example is the car manufacturer GM, which became very profitable after a restructuring, as did Air Canada.”
“You have to see it as an opportunity. You have to make sure you do it correctly, quickly and efficiently,” says Bourque. “What hurts the most is when it goes on too long; it makes employees and suppliers feel insecure, and customers wonder whether they will be able to buy from you.”
Although many entrepreneurs lose control of their business following insolvency, some remain in charge by working with their financial partners.
“Those supporting the company need to be kept in the loop—employees, suppliers and financial partners. The most important thing is often the quality of stakeholder relationships,” Bourque says.
“All the entrepreneurs we have helped at BDC get through difficult times have told us that they have learned a lot and come out of it better entrepreneurs,” Leduc says.