This is according to Gerrie van Biljon, executive director at Business Partners Limited (BUSINESS/PARTNERS), who says that during tough financial times, such as those currently being experienced, South African business owners need to take active preventative measures to encourage sustainable growth and avoid company liquidation.
The May 2016 Statistics of liquidations and insolvencies report by Statistics SA show that from 2010 the number of liquidations have decreased from 3 992 per year to 1 962 in 2015. The first five months of 2016 also reported a decrease of 3.5% when compared to the same period in 2015. “While this decline is encouraging, what is concerning is that 807 business liquidations have been recorded this year already,” says Van Biljon.
The report also revealed that the estimated number of insolvencies – an individual or partnership which is unable to pay its debt – has increased by 12.6% year-on-year in April 2016.
Van Biljon explains company liquidation as the winding up of a business, either voluntarily or by an order of the court, whereby all company assets are sold or “liquidated” in order to pay off the business’ creditors. “This process should, however, be considered a last resort, especially for smaller businesses that have suddenly hit unexpected hard times,” he adds.
“Businesses, particularly small and medium enterprises (SMEs), are encouraged to do whatever they can to restructure and restore distressed, yet viable companies, in order to avoid liquidation where possible,” he says.
Van Biljon provides business owners with the following three tips to rescue a struggling company from liquidation:
- Increase liquidity internally: This may seem somewhat obvious, but without adequate cash flow, efforts to rejuvenate a business will ultimately prove futile. Business owners therefore need to ensure that they have access to the minimum amount of capital needed to stay afloat. If tighter management of the balance sheet isn’t an option, this may require additional funding from existing investors, or a pitch for new investor funding – ultimately, if a business owner can prove that the problems being experienced are circumstantial and can be resolved, funding is often available if sourced correctly. Alternatively, business owners may have to liquidate some non-core part of the business in order to keep operations moving.
- Revise management roles: One of the hardest parts of any business turnaround is restructuring and, when necessary, replacement of management and staff. While this often involves brutally honest and difficult decisions, having the wrong people remain in executive positions can severely hinder a company’s chances of survival. At the very least, a business owner needs to ensure willingness and commitment among management to make the changes necessary to streamline operations and cut out any excess resources to ensure the most cost-efficient production practices are employed going forward.
- Apply for business rescue: The 2008 Companies Act introduced a corporate rescue system, which provides South African companies the opportunity to access interim liquidity and reach a possible compromise with creditors to fund their operations while a business rescue package is being developed. This means that any business experiencing financial distress can file a notice to start business rescue proceedings with the Companies and Intellectual Property Commission (CIPC). In essence, this process will involve the appointment of a Business Rescue Practitioner who will provide opportunities to restructure and strategise, creating an environment in which the business can continue trading.
“It is important to remember, however, that while business rescue does offer an alternative to liquidation for financially distressed companies, the process is largely dependent on the viability of the business going forward and the availability of a source of funding, which means business owners should ideally ensure buy-in from their investors, banks and creditors beforehand,” says Van Biljon.
As South African businesses continue to be faced with multiple economic challenges – some of which just can’t be planned for – it is important to maintain a tight hand on budgets and cash flow.
To assist business owners in this regard, the BUSINESS/PARTNERS Entrepreneurs Growth Centre harnesses the business expertise, skills and wisdom of senior business and professional people to offer free advice and guidance to entrepreneurs. To contact the centre, call 0861 763 346 or visit: www.businesspartners.co.za/entrepreneurship-growth-centre/