Distressed businesses require a review of their financial strategy, not money upfront
Many businesses in distress lookout for new money to revive the business. The fact is that if the source of distress is something other than money, more money will not solve the problem of distress.
Recently, I had a chance to review with a restaurant business that is slipping into distress at an alarming rate. Once they were regarded as a landmark brand in the neighbourhood and the footfalls were very high. Having been here for decades, the restaurant has become a household name and a brand associated with the city. From here they moved to a new classy place of their own, far from the commercial place. At the new location, the company did not reach the level it wanted. The footfalls were lower than previously seen in the business at the previous place. The new site has been developed through high-cost borrowing. Cash flow is not sufficient to repay the debt.
Sensing the urgency to revive the sagging fortune, the promoters have been desperately looking for fresh money for clearing the existing bank facility which is in distress and secondly to fund the working capital which they believe would help them to turn around. In spite of the best efforts, the banks were unwilling to commit. Later, they started to seek funds in the informal market, which is quite expensive and the market is filled with many unscrupulous elements.
New location required new strategy:
Upon studying their situation and financials we found that the money would not solve the problem. Investing more money into the current business model will only increase their distress instead of bringing them back to normal.
The fault was with their business strategy. Earlier they did well because it was closer to the commercial hub. Now, having moved away from the commercial hub, expecting a repetition of the same client with the same way of consuming was incorrect. The business model of catering to the fast-moving population in the commercial centre is not feasible in the new premises. The focus should have been on a different theme of catering to a market of leisure visitors with more time at their disposal and seek to entertain families and social gatherings as well as business clients. It wouldn’t have been too difficult given their strong brand connection with the city.
The business at the new location fails because promoters are not able to refine their business model. Now, investing more money won’t relive the fortune unless they tweak the menu and amenities.
A situation like this where the financial constraints seem to be stronger, but cannot be overcome simply by increasing funding. We need to pause and look at the financial strategy to identify the shortcomings.
Review Financial Strategy – A pointer to identify deficiencies.
A review of the financial strategy enables you to assess your financial needs and the resources required to support and meet your objectives and to fulfil your organisation’s overarching objective, as well as plan for continued growth to enable business success and sustainability.
It focuses on aligning financial management with an organisation’s corporate and business objectives.
This is an exhaustive examination of the financial aspects of the company. A thorough analysis of the financial situation will make it possible to understand the difficulties of the system impartially. It allows the promoters to understand where the flaw lies.
If the reason distress is anything to do with the products, marketing, etc. The review of the financial strategy is an intermediary step and will effectively flag the key concerns.
In our analysis, we identified three key issues: lower than expected sales, lower than expected EBITDA, and higher cost of borrowing. Finally, we found that the company suffered as a result of the wrong strategy. In fact, there was no new customer acquisition plan for their new venture. The new value proposition is not conveyed or any marketing to attract the crowd to dine in the leisure environment. As a result, the company began to suffer losses and on the other hand, the owner continued to focus on mobilizing more money hoping that someday the company will recover.
Second, no consideration was given to its other strengths. Having succeeded for decades, an enterprise naturally carries some lasting competitive advantages. The promoter must be conscious of these strengths. In this case, the store served the market with spicy numkeens and bakery items that could have been monetized by branding and widening marketing channels. It is also very profitable and able to support the company to support without falling into distress. This could have happened with little to no additional funding.
The struggling company should do an in-depth analysis of the financial strategy rather than simply explore new financing options. This review would identify critical issues that need to be resolved to overcome distress. Let us not forget that if money is not a source of distress, more money will not solve the problem of distress. The analysis of the financial situation will lead to a potential examination of business practices, processes, cultural products, etc. Therefore, the course correction can be completed before the situation worsens.