It seems the government is serious about trying to transform our economy with its National Innovation and Science Agenda, which is focusing on four key pillars:
- Culture and capital
- Talent and skills
- Government as an exemplar.
Innovation is an important element of any business, and can be a key differentiator between market leaders and their rivals. Our competitors can now be anywhere in the world, and that world is always changing.
It’s important for small businesses to innovate so they can evolve and stay competitive. For innovation to thrive in Australia we need a cultural shift, and the government plays a big part in creating an environment where innovation and entrepreneurial behaviour can thrive.
And Rapsey Griffiths is no different. We also need to be innovative, not to mention progressive. That’s why our insolvency and advisory firm focuses on the principles of Eliminate, Automate, and Delegate to create an innovative and competitive advantage.
Innovation isn’t just about tech entrepreneurs working on the latest toys and gadgets. It’s just as much about:
- improving or reinventing manufacturing practices
- developing new business models from sharing economies (such as Uber and Airbnb)
- inventing new products and services.
But today I want to look at the proposed reform to Australia’s insolvency laws in the context of the government’s agenda of innovation.
Compared to other countries, our current insolvency laws focus too much on penalising and stigmatising business failure. We need a balance between the rights and responsibilities of the debtor and those of the creditor. Fortunately, the government now understands that entrepreneurs may fail several times before they succeed, and will probably learn more from their failures than their successes.
A far cry from the attitude of entrepreneurs in the US, such as Poppy King (lipstick entrepreneur) “if you haven’t been in Chapter 11 you’ve never been in business”.
And so the government is looking at amending our insolvency laws. Changes being considered include:
- reducing the default bankruptcy period from three years to one year
- introducing a ‘safe harbour’ for directors from personal liability for insolvent trading if they appoint a professional restructuring adviser to develop a plan for turning around a company in financial difficulty
- banning ‘ipso facto’ contractual clauses that allow an agreement to be terminated solely due to an insolvency event when a company is undertaking a restructure.
Early this year, the government released a proposal paper outlining the specific changes. They want input from the public on how best to implement these measures and encourage Australians to embrace risk, learn from mistakes, be ambitious, and experiment to find solutions.
Public submissions on the proposal paper closed on 27 May 2016. The government is expected to introduce legislation in mid-2017.
These developments are encouraging for businesses. They will allow entrepreneurs to explore realistic alternatives to preserving the economic value of their company if it’s in distress. And before looking to appoint a Voluntary Administration or Liquidator they’ll be able to explore options for a genuine turnaround such as:
- an organisation and process restructure
- asset sales
- cost cutting
- a debt and equity restructure
- a financial balance sheet restructure.
Of course, it’s important to get the balance right and have the safety net in place so people can’t abuse the process.
Turnaround management is a relatively new and emerging field in Australia. But as more businesses become aware of it, and stakeholders such as banks, creditors and employees see the value in the process, it will have a positive impact on the rate of corporate failure.
For a successful turnaround, the management team must be able to confidently answer these questions at key milestones during the process:
- Can we demonstrate that the core business is viable?
- Can we manage and ‘motivate’ key stakeholders?
- Does management have sufficient credibility?
- Is our business’ reputation intact?
- Can we obtain sufficient credit from suppliers?
- Can we secure internal and/or external funding?
- Is there sufficient cash flow funding?
Once it’s established the business can be rescued, a plan needs to be developed that allows enough time and financial resources to address the business’ fundamental problems by tackling the underlying causes of the failure.
A successful turnaround has seven essential elements:
- Crisis management – Taking control; performing critical cash management; reducing assets; arranging short-term funding; starting cost-reduction measures.
- New management – Changing CEO, and assessing and changing senior management where required. A change of management is needed because the CEO was steering the ship leading up to the failure. Changing management sends a strong message of confidence and change through the business and to external stakeholders.
- Stakeholder communication — It’s important to engage all stakeholders in the process. Clear, consistent and predictable information and communication is needed to ensure stakeholders have confidence in the turnaround plan.
- Strategic review — Revisiting the business strategy, and considering divestment, asset reduction, downsizing, outsourcing or investment.
- Culture and operational changes – Making structural changes in the business; reshuffling, changing or reducing line/middle management; improving communication strategy.
- Critical process improvement – Improving sales and marketing; making further cost reductions and efficiencies; focusing on the principles of Eliminate, Automate and Delegate.
- Financial restructuring – Refinancing, reducing assets; making debt and equity changes.
And remember: prevention is always better than cure. When business owners come to us for help with saving their business or turning it around it’s often too late, and the only solution is Liquidation or Bankruptcy.
As a business owner, you need to invest in a great support team. And the captain of that team should be your accountant. And not an accountant you see only once a year to find out how much tax you have to pay. You need one who is your trusted advisor.
I see too many business owners who don’t invest in finding and developing a support team that will add value to their business. Don’t make the same mistake. Get in touch with us here at Rapsey Griffiths, and let us help your business not just survive, but thrive.