Breaking out

Navigating out of the danger zone

Well, first of all I should say a huge thankyou to all of the regular Moving Tribes readers who took the time to comment, share and feed back on last week’s post, and an equally huge welcome to the large number of you who have joined the MT gang on the back of the social media and press coverage the piece generated.

When a post resonates like that one did (and I’m grateful to both the Guardian and the Sunday Times for their coverage of it) it is both a surprise and yet at the same time not a surprise. You can never quite predict what will strike a chord, but in these challenging times it seems fitting that a post about how it feels to be in the middle of the storm was one people wanted to react to.

That the storm is a real one with lasting impacts was brought home to me yet again late last week visiting a local independent restaurant. I can never resist asking a retail or hospitality business how trade is going, and the owner of this venue was very clear in her response. Trade (number of punters on seats) was “OK” but business (turning those bums on seats into profit) had never been more challenging. All of their costs had skyrocketed (with a particular nod to the eightfold increase in their utility bill). Compounding those cost increases was the reality of the impact of the cost of living crisis on customers - which meant that she felt that she couldn’t increase her prices nearly as fast as her costs, with an obvious impact on her margins and profits.

This restaurateur is a pretty practical and no-nonsense type, so what really stood out for me from this discussion was the obvious weight that the pressure of this situation was putting on her. The strain was clear (and will be familiar to operators of shops, restaurants, bars and cafes up and down the country) and to be honest I’m not sure how much longer that particular venue will stay open.

I think it is the fact that, whatever the marginal ups and downs of GDP growth, real trading has never been harder which is the reason that so many people have reacted to a story like the Wilko one and to my post.

I’ve been reflecting, then, on what further advice I’d offer a business that was worried that things were going south but was not yet quite in the last days before administration. How does the world change when trading is tough, and what new or different things should you pay attention to? Here are a few thoughts:

• Cash is king - the reality that it is shortage of cash, not profit, that drives a business under means that in tough times you need to trade differently. Paying attention to every cash in- and out-flow is a good start, but there are also different commercial strategies you can follow when cash is the focus. Better a 10% margin paid up front than a 12% margin payed in 90 days when the wolf is at the door.

• Have no sacred cows - building on the importance of cash, if you have a valuable asset or subsidiary that you might be able to sell, you should consider it as one of the ‘bags of sand’ to throw out from the balloon before it is too late. I’ve witnessed a business with a valuable overseas subsidiary refuse to sell it (“Because it will signal to the market that we can’t run businesses overseas”) and then go bust as a direct result. Don’t be that Board.

• Use your strength in your supply chain, if you have it - if you are an important outlet for your suppliers and your finances are imperilled, ask them for help. Extended payment terms, rebates and product exclusives can all help, and you might be surprised at how deep your suppliers will dig. The last days of Game saw key suppliers prepared to be extra-ordinarily generous in order to try to keep what they saw as a key channel afloat.

• Take good advice - as the post last week hinted, there are a lot of traps for the unwary leadership team when a business is in difficulty. Wrongful trading is the most obvious, but there are others - do you have an underfunded pension liability, for example, because if you do then the regulators have legal powers over both the business and the directors. A good Company Secretary or Legal team is utterly essential when times are tough - keep them close.

• Be thoughtful about the ownership structure of your business - the public market, in particular, is a horrid place to be for a business in financial trouble. If you and your team believe in the value of your business then consider whether an MBO or other transaction might give you the breathing room to realise it. I can point you to several businesses on the FTSE markets, for example, whose market capitalisation is less than the cash they have in the bank, meaning the implied valuation of their core business is actually negative - that’s no place to be.

• Communicate, Communicate, Communicate - I made this point in last week’s article too but it bears repeating. It is a hideous experience to be a rank-and-file colleague in a business in trouble and not know what is going on. Your teams deserve to hear from you clearly and frequently. But as well as a moral imperative, there is a practical one too - if your colleagues don’t know what is going on they can’t help, but if they do then you can enlist them in any and all of the turnaround plans you make. I have never failed to be amazed and humbled by the strength of support I see businesses getting from their teams and you will be too.

If you recognise the margin squeeze and tough trading environment that my restaurant friend described, then I hope these points give you some practical food for thought. Beyond that, if you want to chat at any point then I’m easily contactable, both here and through the obvious social media. No-one who has been through a business failure will ever fail to give an hour and some advice to someone else going through the same thing, and I am no exception.

That’s probably enough on liquidity crises and business failure for now, though. Next week I’m going to give you the gift of the single worst way to predict whether a retailer’s share price is going to go up or down!