Early intervention key for organisations heading towards financial distress
In his Medium Term Budget Policy Statement (MTBPS) delivered in October, the Finance Minister, Tito Mboweni, revealed the extent of South Africa’s growing fiscal and economic woes, with the most significant cause for concern being that the country’s debt to gross domestic product (GDP) ratio is currently projected to breach 75% within the next three years.
It is clear that the challenges South Africa’s economy currently faces have a far-reaching effect on business and industry across the board. A rising interest rate cycle, for example, impacts cashflow - as the interest rate swells, so to do cash payments to financial institutions. This can negatively affect the ability to service debt, resulting in debt default. Equally, the ability to generate the required cashflow for normal day-to-day operations is typically compromised due to constraints in customers buying power.
Meanwhile, a low growth economy - or an economy in a technical recession - also negatively impacts on business. Put simply, it means that business as a whole, is struggling. No (or limited) growth in the economy affects the growth of organisations.
As a result of these challenges, more and more organisations are finding themselves with no choice but to seek formal protection under business rescue proceedings.
Early intervention is key
Broadly speaking, most of these organisations often do not realise that they are heading towards financial difficulty or that they are in financial distress until it is too late.
Regardless of the industry the organisation operates in during these trying economic times, regular health checks are required to assess and address situations where profitability and revenue are in decline.
Before an organisation is firmly in distress or crisis, it is important to understand the root cause of distress and implement measures to streamline the business. The ability to effectively perform these tasks depends largely on the capability and capacity of management.
Organisations that lack good corporate governance do not usually address solvency, liquidity and indicators of financial distress in board meetings. Those that have good corporate governance – in which management regularly looks at the forecast and really understands the business and the key macro-economic drivers that impact the industry in which they operate - are able to determine a sensitised forecast which should highlight potential liquidity issues. More importantly, these management teams acknowledge that they require specialist assistance to get the requisite help early on.
In this increasingly complex environment, early intervention, in the form of turnaround and restructuring services, is key to salvaging recovery for stakeholders and ultimately avoiding the catastrophe of collapse.
Early intervention ensures there are many more options available to organisations and that the discussions and negotiations are more consensual in nature. On the contrary, delaying this intervention can make the process more difficult and result in fewer options being available, which in turn, leads to a worse result for stakeholders.
It was with this in mind that Deloitte recently relaunched its Restructuring Services in Southern Africa, convening industry leaders for a morning of debate and dialogue that unpacked the implications of the headwinds facing our markets and economies in the context of global tensions as well as future opportunities emerging across the continent.
Many management teams believe they can manage the restructuring process themselves. The reality is that this is a specialist skill and not something you can expect all managers to be proficient in. The discussions and negotiations required during the restructuring process can be contentious and demanding. Management teams are not always best placed to lead these initiatives.
Stakeholders are now starting to recognise that support is required given the complex environment in which we are now operating where we are increasingly seeing multi-jurisdictional and global creditors as well as a shift in cross-border capital. We now have more non-regulated debt and private capital and that brings a challenging dynamic to discussions and negotiations.
When a business is facing volatility and financial distress in a the increasingly complex environment we are in, it is imperative that the business leverages the support it requires in order to navigate the uncertainty and be in a position where it is able to identify the root causes of financial distress, not merely fix the symptoms. Overcoming the challenges of financial difficulty or financial distress is not easy but with the right advice, guidance and support - it is possible.
For more information go to: https://www2.deloitte.com/za/en/pages/finance/solutions/restructuring-services0.html
Thando Ntsinde Edelman
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