Christmas is long gone and the short weeks caused by public holidays are behind us until April. Before you plan the rest of your year, it’s time to take stock and look at conducting this ever-important “annual health check” on your business.

The current New Zealand economic climate is buoyant and businesses are well positioned for growth. This means it’s even more important that Boards and owner-operators conduct regular health checks on their business to ensure their operations have a solid foundation. It’s also important they allow the business to position itself for growth, or simply to avoid the pitfalls of financial distress.

Reviewing a company’s capital, governance, operations and being aware of what the market is doing, can provide a number of early warning signs and key triggers to analyse the state of your business and, during periods of growth, avoid over-trading – before it’s too late.

So, here’s a quick checklist of some of these early warning signs that Boards and business owners should be on the lookout for, as part of their annual health check.

Capital

  • Additional funding requests – requesting funding over and above those forecast by the company can be a tell tale sign that all is not well. This might be in the form of multiple overdraft extension requests for new funding lines, such as equipment finance or term debt.
  • Breaching facility limits and covenants – this can take the form of a company breaching its overdraft facilities with multiple excesses each month.
  • Default on debt repayments – failure to make debt repayments in line with agreed terms can be a key indicator for financial distress in a company.
  • Having alternative bank accounts – this can be a risk if a company has its debt facilities with Bank A, but uses Bank B for its transactional banking.

Governance

  • Lack of strategic direction – a company should have a clear business plan with measurable milestones and targets. A lack of direction may result in a company underperforming.
  • Change in control or ownership – a change in control can seriously impact the way in which a company operates, which can occur through the sale of a company to new owners or simply as a result of key personnel taking annual leave or an extended break.
david webb nz

David Webb of the Restructuring, Insolvency and Turnaround Association NZ.

Staff/Management

  • Key staff leaving – if your business success is contingent on key personnel who have specialist skills or are crucial because of their in-depth knowledge and key customer contacts, the organisation can become vulnerable. If this individual were to leave a company without passing on their knowledge or contacts, it could affect the viability of the business.

Market

  • Material or adverse market change – changes in market conditions can impact the way in which a company operates and therefore demand for its good and services. For example, a new competitor entering the industry, new technological developments or changes in legislation. It’s important to be aware of what’s happening in your industry, so that your business can be prepared for any changes before they occur.

Operations

  • Working capital deficiency and trading losses – a deficiency in working capital may indicate financial distress or could also be an indicator of overtrading. Similarly, ongoing trading losses (as these need to be funded somehow and cannot continue indefinitely), can also be an early warning sign.
  • Accurate financial reporting – ensuring that your company’s financial reporting is up to standard is vital, you don’t want management and directors making key decisions based on incorrect information.
  • Actions taken by a creditor – do you have any outstanding statutory demands against the company? The existence of payment plans with suppliers and other creditors, such as the IRD, can be a potential sign of financial distress.

To give you peace of mind for the year ahead and before you embark on setting strategies and business plans, it’s advisable to complete a quick health check on your business. The quicker you can recognise any of these signs and act accordingly, the more likely the business can stay in a healthy position and be positioned favorably for growth.


David Webb is treasurer at the Restructuring, Insolvency and Turnaround Association of New Zealand (RITANZ).