What is a business turnaround?

A business turnaround is everyday management to rescue a declining company that has been performing badly for a long time and will fail without corrective action. A turnaround aims to stabilise the business and secure its future.

Turnarounds occur at the pre-insolvency stage and require a business to carry out informal actions.

Business turnarounds are hands on and require:

● Acknowledging problems in the business.
● Considering the changes needed to solve those problems.
● Developing and implementing a problem-solving strategy.

How do you turn around a business that is failing?

A business turnaround plan is the blueprint to saving a failing company. The plan needs seven key ingredients for the turnaround plan to work well:

1 Crisis stabilisation
2 Leadership
3 Stakeholder support
4 Strategic focus
5 Organisational change
6 Critical process improvement
7 Financial restructuring

There are various strategies needed to make each of these ingredients work. For example, under crisis stabilisation, there are strategies such as taking control of the business, cash management, asset reduction, short-term financing and first-step cost reduction.

What are the key characteristics of a successful business turnaround plan?

For a business turnaround plan to be successful, it must have these characteristics:

● Address the fundamental problems in the business.
● Tackle the underlying causes of the problems, not the symptoms.
● Be broad enough in scope to acknowledge and resolve all the key issues.

An effective turnaround plan considers the big picture and not the individual problems in isolation. Make sure the plan does not get bogged down in too much detail. It’s much better to act fast rather than spend days working on an overly detailed plan.
That said, the plan won’t work if it’s not carried out efficiently. When executing your turnaround plan, make sure it is:

Comprehensive: It needs to be both tactical and strategic.
Non-linear: The timing of a successful turnaround process requires simultaneous rather than linear sequencing.
Wide-ranging: Broad enough in scope to tackle soft and hard issues, and short- and long-term priorities.

How do you implement a business turnaround strategy?

At Byronvale Advisors, we break down the business turnaround process into four overlapping phases:

Analysis phase
At this stage, perform a diagnostic review and then evaluate the turnaround options. Choose one option and get started on the immediate crisis actions. Establish a trusted turnaround team so they can develop a plan.

Emergency phase
This phase involves executing and managing the actions required within the plan. There is usually a heavy focus on liquidity management, operational factors, cost control and stabilising sales.

Strategic change phase
This phase looks at areas that will strengthen the business in the long-term – revisiting standard operating procedures, looking at IT systems and processes, or considering products and markets to decide what changes the business needs for ongoing and long-term viability.

Growth and renewal phase
Once the business balance sheet has improved, the business can either grow again organically, via merger or acquisition, or both.

Each phase incorporates several of the ‘ingredients’ and turnaround strategies mentioned earlier.

How sophisticated and intrusive the turnaround implementation will be depends on the complexity of the issues, the size of the business, and how much help the directors want from the turnaround consultant. An engagement might last a few months or 2-3 years.

What should be the first step in the turnaround management process?

The first step in a business turnaround management process is a thorough business analysis. Do a diagnostic review of the entire business to assess the issues and then prioritise what to do to fix them. This diagnostic review is best done by an experienced turnaround consultant.

After this, company management and the turnaround consultant will agree on a strategy to address and remedy the issues.

Do you need one of our turnaround consultants to look at your business and advise you on a business turnaround? Call 1300 004 404 or email info@byronvaleadvisors.com.

What does a business restructure mean?

A corporate or business restructuring is the process of reorganising one or more aspects of a business to increase its efficiency and profitability. Restructuring is an umbrella term that encompasses four distinct groups of activities:

● Expansion
● Contraction
● Financial Restructuring
● Organisational Restructuring

What are the objectives of business restructuring?

The aim of a corporate or business restructure is to improve the current situation and respond to the ambitions of the business owners. For some businesses, this could mean an operational restructure to bring efficiencies to the business. For others, a restructure may mean pulling the company out of imminent insolvency and liquidation.

What are restructuring strategies?

Each restructure is unique and there is no one-size-fits-all strategy, but in simplistic terms, this is what a restructure would look like:

The first and most essential step is acknowledging and taking ownership of the problem. You must have the desire and energy to make changes. The sooner you can do this, the better. Delaying restructuring only limits your options and increases the risk of business failure.

The next step is a diagnostic review to identify the key problems within your business. This review will usually uncover several issues which the restructure will need to address; cash flow, staffing, financial management, operations, processes or debt. This is best done by a person from outside the business who is independent, objective, and experienced.

After the review is complete, develop a restructuring plan and engage experienced advisors to direct the restructure. Restructuring a business always has its challenges.

There will be different plates spinning all at once, so it can look very chaotic and lacking direction. For business owners, this is often a challenging period in a business restructure. We suggest considering each spinning plate and its effect individually rather than the whole restructure. Look for ways to achieve some quick results. This will keep motivation up while continuing to work on medium and longer-term plans.

The last step is the future strategy step. Do this after the more immediate issues are mostly resolved, and the business has a more stable platform to make medium and longer term decisions.

Restructures typically take between six months and three years depending on the size of the business, the complexity of issues, and the ongoing support and motivation of the management team.

How do you write a business restructuring proposal?

A business restructuring plan has 6 components:

Executive summary

A summarised overview of the important aspects of the restructuring plan covering:

● The purpose of the plan
● A brief description of the company
● The history and marketplace
● Highlights of the financial projections
● Proposed restructuring, funding requirements, and strategies

Operational analysis and action plans

A SWOT analysis of each core business process and each major support function, then a detailed series of initiatives that address weaknesses and opportunities – operationalising the restructuring strategies into a series of actionable, measurable and quantifiable steps.

Financial projections

These include the basis of any refinancing, financial restructuring, or negotiations for ongoing support from stakeholders. Financial projections set out the financial implications of the restructuring strategies and detailed operational actions, which in narrative form provide the core of the plan.

Implementation process

There should be a description of the whole implementation process including milestones, key performance indicators, reporting timetable and an internal communication program to roll the plan throughout the business.

Risk assessment

An assessment of risk is critical for all stakeholders when deciding whether to support the restructuring plan.

Review process

A restructuring plan should outline when and how the restructuring plan will be reviewed, and by whom. The reviews should involve a restructuring advisor especially if you are relying on safe harbour provisions.

What are the benefits of restructuring a buisness?

When done properly, a business restructure makes your business more dynamic and innovative. It becomes more efficient, robust and profitable.

Do you need one of our restructuring advisors to help you restructure your company? Call 1300 004 404 or email info@byronvaleadvisors.com.

In Australia, company restructuring engagements are a relatively fresh approach to preserving and improving business operations, particularly for small to medium businesses.

Restructuring a company involves reorganising one or more aspects of the business to increase its efficiency and profitability. Restructuring is an umbrella term that encompasses four distinct groups of activities:

● Expansion
● Contraction
● Financial Restructuring
● Organisational Restructuring

A company restructure aims to rescue a business and avoid liquidation or insolvency outcomes . If this is not possible, a restructuring may also provide better outcomes for the company, its creditors and directors.

How you restructure your company will be unique to you and your situation. However, there are four major benefits that come from the process of business restructuring.

Reduce Costs

A company may lower its operational costs if it downsizes during restructuring. For example, the business can cut its payroll expenses if it dismisses some of its employees. Outsourced operations are usually less expensive than in-house labour. Thus, the cost of maintaining operations within the retail network and company specifically decreases with restructuring. Costs would also reduce if the company could merge with another company that is very similar and use economies of scale to run more efficiently.

In this way, the company can expand its reach without adding too much to the overhead of the business. If handled correctly, the business will provide significant value for its shareholders.

Better Communication

Decision-making and communication will usually improve when a company removes or reduces layers of management during its restructuring.

By streamlining its management structure, the company reorders its organisational hierarchy, which opens the lines of communication and removes any burdens impeding productivity.

More Efficient Operations

A company’s overall operations may become more efficient if it brings in new technology during its restructuring process. For example, digital workflow management programs will help employees keep track of what tasks they need to do and how they align with those of their colleagues. Accounting software can help finance departments record all cash flows and ensure that the business leaves no transactions out.

This way, staff and management won’t get bogged down in menial work and can instead focus on tasks that help grow the business.

Increase Value of Business Units

A primary reason a company will restructure is to divide the business up for sale. If a company is trying to sell as a conglomerate, it will probably get lower offers from investors.

However, when management divides the company into separate business units, it can often get more attractive offers for those individual components. This can raise the value of the company and may secure a more lucrative sales price for the business.

When done properly, a business restructure makes your business more dynamic and innovative . It becomes more efficient, robust and profitable. However, improving and streamlining your business operations to achieve your business goals is no simple task. You may not know what to do or even where to begin.

An experienced restructuring advisor will look over your business and its circumstances with a fresh pair of eyes, and provide you with the advice and expertise you need to get on track to running your business better.

Do you need one of our restructuring advisors to help you restructure your company? Call 1300 004 404 or email info@byronvaleadvisors.com.

What does Safe Harbour Insolvency mean?

Safe Harbour allows directors to take reasonable steps to trade the company out of financial difficulty without concerns about personal liability, or unnecessary effects to the potential value of the company by prematurely appointing a voluntary administrator.

It is a strategy where the directors remain in control and the ‘better outcome’ is for the business, employees and shareholders. On the other hand, formal insolvency options pass control of the company to the creditors, who ultimately decide its fate. Safe Harbour promotes a cultural change within the Boardroom to turn the company around.

What is the purpose of Safe Harbour Insolvency laws?

Safe Harbour gives directors time to undertake a restructure of their business, remove the risk of insolvent trading, and achieve a better outcome.

This ‘better outcome’ is for the company and all its stakeholders, including creditors, employees, customers, and shareholders. ‘Better outcome’ can mean that all these stakeholders will be better off, either by restructuring to make the company more viable in the longer term or preparing for a more orderly formal insolvency.

What are Safe Harbour Insolvency Provisions?

Safe Harbour provisions give company directors protection from insolvent trading penalties and an opportunity to pursue strategies that could save their struggling business.

In September 2017, the Federal Government amended the Corporations Act to provide directors an avenue to continue trading even while the company was insolvent if there was a reasonable expectation of a better outcome. That outcome is defined as ‘better’ than the immediate appointment of an administrator, or liquidator, to the company.

On 22 March 2020, the Act was further amended amidst COVID-19. These new amendments provided further relief for financially stressed businesses, including an additional ‘safe harbour’ from insolvent trading liability regarding debts incurred during the following six months ‘in the ordinary course of the company’s business’.

This COVID Safe Harbour provides useful additional relief for companies and their directors, particularly those dealing with unprecedented changes to their business conditions and need time to assess the company’s position before developing a turnaround plan or pursuing an insolvency administration. Unlike the 2017 Safe Harbour provisions which are in place permanently, the Government will discontinue the COVID Safe Harbour by the end of 2020.

Safe Harbour starts when the decision is made to commit to the process, and the development of a course of action starts. However, the safe harbour provisions end when it is no longer reasonably likely that the course of action will lead to a better outcome. It also ends when the course of action is not followed.

Am I eligible for Safe Harbour Insolvency ?
Safe Harbour is only available to directors who are closely monitoring and involved in the financial position of a company and have:
● Paid employee entitlement on time; and
● Have appropriate financial records which are up-to-date; and
● Ensured no misconduct by officers and employees; and
● Kept and maintained tax reporting records and obligations.

The directors also need to develop a course of action that is reasonably likely to lead to a better outcome.
How can you get started with Safe Harbour Insolvency?
Before considering Safe Harbour, or putting your company in voluntary administration, talk to a turnaround advisor. Know that using the Safe Harbour provisions will be hard.

Directors also must:

● Have the energy and desire to drive the turnaround
● Understand their obligations
● Know the company’s financial position
● Seek appropriately qualified advisors to advise them
● Put a plan in place and document decisions made
● Continually review the course of action to ensure it is reasonably likely that there will be a better outcome

How do you declare Safe Harbour Insolvency?

Safe Harbour can be completed in privacy. Formal insolvencies are done in public, which can have an adverse impact on the value of the company, the ability to refinance, and in some industries such as the construction industry, the ability to continue operating.

In Part 1, I outlined the 10 financial figures and ratios, how to compute them and what they show. However, to make the most of this information you must understand what the information is telling you and how to apply this information in your business. The 10 figures and ratios were grouped into three types – Profitability, Activity and Liquidity.


If we find that the profitability numbers are low, we can take some quick steps to improve the numbers.

Increase revenue

“How do we do this?” I hear. “We are selling as much as we can and we can’t afford the investment in more staff or materials, and even if we could we don’t have the capacity!” Or, “It is a competitive marketplace and we have to sell our product as cheaply as we can.”

How about increasing your revenue by 2% every year? Cost pressures rise with inflation – the raw materials, fuel etc. all rise by a small amount gradually. When they do, your profitability – gross margin – is getting squeezed.

Let’s say you buy a coffee every morning on your way to work for $3.60. It’s convenient, and the coffee is good. One day, you go to pay for your coffee and the price has increased to $3.70 – you would most likely pay the $3.70 and continue your normal daily routine and continue paying $3.70. This is a price increase of 2.78%.

These slight increases either protect your Gross Profit Margin or goes directly to your overall profitability. Furthermore, how many customers would you be likely to lose? Customers that are so sensitive to such small increases are often customers that you are better off not retaining. To minimise the impact try even smaller but more regular increases, perhaps quarterly – the impact on the customer is even less noticeable.

Another way to look at this is –

2% increase = it is unlikely you would lose a customer

10% increase = would you lose less than 10% of your sales in dollars?

50% increase = would you lose less than 50% of your sales in dollars?

Reduce Cost of Goods Sold

This is a lot harder than increasing profit as you are restrained by the variable components making up the cost of goods sold, and the volume being produced and/or sold. Apart from improving profitability, I think the process of looking at how you can reduce the cost of goods sold will give you a much better understanding of the drivers, pain points, restrictions, and opportunities in your business.

But here is a list of ideas – not all, and maybe only a few will be applicable to your business.

● Source cheaper inputs or materials. I worked with a steel manufacturing company and the supplier of a raw material would sometimes restrict supply to keep the average price higher. Not only did this affect certainty of supply, but it also kept the cost of goods sold high. This company turned around and sourced an alternative raw material from overseas, which in turn led to a joint-venture proposal.
● Just in time – buy the materials when you need it. The same steel company had an inventory policy whereby if they sold a particular item they would reorder the material immediately. While I was with the company, they sold steel for a wine vat and reordered the materials – that hadn’t sold steel for a wine vat for the four years prior and they probably haven’t since.
● Buy in bulk – yes, I just said buy just in time, but if you have the capability and the working capital, you may find buying in bulk will lower your per unit input cost and the cost of goods sold.
● Reduce waste – particularly if the cost of the raw material is high. Let’s say you make granite benchtops – a high-cost material. If you can use exactly the right size material, you will minimise the waste and reduce your cost of goods sold.
● Standardise product features – remember what Henry Ford said about the Model T Ford – you can have it in any colour as long as it’s black. Reducing options and non-standard features will reduce your costs.
● Look at total cost – the material cost is just one factor – what about funding costs, delivery costs or delivery time. Could you pay for the material quicker and get a more favourable price? Could you order earlier and reduce postage costs with slower delivery?
● Team up with someone else – could you team up with someone else to get a better price?
● Get a long-term supply contract – At Byronvale Advisors, we discount our hourly rate to clients that enter fixed price or retainer contracts. Apart from providing certainty of cashflows for us, it lowers the price for the client, and it provides them price with certainty.

Activity ratios

Activity ratios tell the business how efficiently they are using their short-term assets, especially cash.

Having lots of capital tied up in inventory and debtors means the business has to get the cash to pay for them – either through its own reserves, borrowings or by delaying paying creditors.

What is optimal depends on the industry and the products being sold, but as a generalisation: –

Debtor days < Creditor Days – have your customers paying you before you have to pay your suppliers
In the example above Debtor Days were 38 days and Creditor Days were 60 days – customers are paying quicker than the need to pay the suppliers.

Inventory Days < Creditor Days – you are selling the inventory before you have to pay for it
In the example above Inventory Days were 61 days and Creditor Days were 60 days – inventory is being sold about as quickly as the suppliers are being paid for it.

With inventory there are a few common factors to be mindful of: –

● Accounting valuation method can affect the overall valuation of the inventory.
● Obsolescent or hardcore inventory can affect the inventory valuation and days. Accounting standards do also have rules for writing the valuation of obsolete inventory down.
● Buying inventory at a discount can both positively and negatively impact Inventory days. There is a balance between the value of the discount and the cost to fund the increase in inventory.

Discounting sales can affect working capital positively and negatively. Offering customers a discount may increase the sales and/or decrease debtor days. If the discount increases the sales but does not decrease debtor days, then consider the impact of working capital and cost of funds. Likewise, if the discount reduces debtor days but does not increase volume, what is the impact on gross margin and profitability?

Chasing debtors is never fun, but remember, the debtor amount is your money that someone else has. Would you be comfortable lending the customer the same value in cash that you withdrew from your bank account? It makes a big difference to your bank balance if they pay you.

I have only ever had one client that turned into a bad debt. It was when I had sent several reminders and finally threatened legal action that they put themselves into voluntary liquidation. During this period my wife had been saying I should have been pursuing the client and threatening legal action but my rhetoric question to her was “If the client walked into our house, found my wife’s purse and took all the cash out of it, put it in their pocket and walked out the door what would you do? You need to invest the time to ensure you are paid in a timely manner and pursue late payers.

Liquidity ratios

A caveat on Liquidity Ratios – the ratio is just the start of the conversation. Ratios need to be benchmarked against like businesses and over a period of time. After the ratio is determined analysis also needs to be undertaken of the makeup and timing of the liabilities.

A not-for-profit client had a balance sheet similar to this:

Current Assets
Cash 20,000
Prepaid Expenses 60,000
Total Current Assets 80,000

Current Liabilities
GST 2,400
Income in Advance 21,750
Provision for Prize Money 7,500
Provision for Grants 6,200
Trade and Other Payables 32,300
Total Current Liabilities 70,150

Current Ratio = 1.14
Quick Asset Ratio = 0.29
Cash Ratio = 0.29

A quick glance would indicate that this organisation can pay its short-term liabilities by liquidating its short-term assets. However, by looking at the Quick Asset and Cash Ratios would indicate it could only cover 29% of current liabilities if it had to liquidate its assets quickly, and this would not even cover the trade payables. The Quick Asset and Cash Ratios however do not look at the timings of the current liabilities in the calculation. In the above example in a ‘fire sale’ situation the Income in Advance contractually would not need to be paid.

The prize money provision was also payable towards the end of the 12-month period. The major creditor in the Trade Payables has, over a period of time, demonstrated they were lenient on enforcing payment terms. So, if I were to adjust the Quick Asset Ratio and Cash Ratio to reflect only the items that are immediately payable, the ratio would be 2.33 or 233%.

So, liquidity ratios are very useful, but require a little more skill in interpretation.

Over the last few weeks, we have seen an unprecedented amount of business closures, while businesses that are still operating are facing tougher trading and liquidity conditions. Either sales are slowing and/or cash collections have become more difficult. Consequently, a lot of companies will endure, or will face, insolvency. So, how can the risk of insolvency be reduced? My six actions are: –

1. Be aware of your company’s financial position
The first action is to understand your financial position. Do not wait until your tax accountant does your quarterly BAS return in May. You need to know the 10 key financial performance numbers which are easy to learn and understand. You can find them in my free eBook here. Make sure you are up to date with the lodgement of your various tax returns, employee entitlements and super and GST payments. Also, it is wise to look at actuals against budget and forecast for the next six months both the profit and loss and the cashflow.

2. Improve your cashflows
Cash is the lifeblood of any business and now is the time to remain vigilant in monitoring and managing cashflows and being active at rectifying potential problems. Some areas to focus and act on are:

● Invoicing more regularly and billing promptly. Don’t wait until the end of the month.
● Focusing on collection from debtors and being proactive. A lack of communication causes many unnecessary problems, so talk to your debtors and come up with solutions that help both of you such as payment plans.
● Accepting credit cards. It is better to lose 1-3% on credit card fees than not get paid or wait a long time to get paid.
● Looking at stock levels. If you can convert stock into cash by moving it do so, even if it is at cost.
● Avoiding over-trading. Do not take on a large order if you do not have the resources to fulfil it. Those resources might be stock, or people, and both these will require cash resources before the customer or client makes payment for the sale.
● Selling assets. Just this week, I walked around a client’s car park and identified three utes and a truck that I got them to sell.

3. Check overhead expenses
This is often looked at when times get tough, but I see two main issues arise. First, business owners wait until way after the sales fall e.g., they see their sales in April fall but wait until June when the cash inflow because of the lower April sales falls before they look at overheads. Second, they do not take severe enough action. Act hard and fast on cutting overheads and then when conditions improve growth overhead expenses slowly and incrementally.

4.Investigate financing options and talk to your bank
Look at debtor financing or factoring to get the cash in the door quicker than waiting for the customer to pay. Talk to your bank now, and with a plan and vision about what support you need, why you need it, and when you expect reverting to normal trading/financing conditions. Make sure you talk to your banker in person (or by video-conference) and not just by email. People like to know the people they are dealing with and this needs to be by being visible.

5.Communicate with creditors

The worst thing you can do is ignore creditors. These are people and businesses that have invested in your business by providing you credit. Be open and honest as possible. Talk to them and they will be more likely to help you out. Also, the creditors at the bottom of the list of who gets paid in an insolvency event are probably the ones more likely to cooperate in renegotiating payment terms. Last, do what you say you will do. If you say to a creditor, you will pay them something on Friday, then pay them something on Friday.

6. Seek help

Australian Small Business and Family Enterprise Ombudsman Kate Carnell announced an inquiry to examine the insolvency industry last year. According to a discussion paper issued by Ms Carnell in December 2019, the clear message was that small businesses experiencing financial difficulties frequently “ignore the signs of financial distress, hoping or believing that things will improve, until it is too late.” Therefore, remedies that could have been implemented to turnaround the business had the owner promptly sought professional help often elapse because of delayed response. The ombudsman said that “it’s crucial that small and family businesses experiencing financial difficulties understand they don’t have to go it alone. Rather than toughing it out, lean on a trusted advisor. The sooner small and family businesses get help, the more likely it is they can achieve a turnaround or restructure.”

There are also provisions in the Corporations Act known as Safe Harbour, which allow directors protection from insolvent trading penalties if they implement a plan that has a reasonable expectation of achieving a better outcome than putting the company into administration. To avail themselves of these provisions, the directors need to engage a qualified restructuring advisor.

Most people in business are great at what they do, but when you talk to them about financial figures, they run for the hills. There are ten basic numbers and ratios every business owner just needs to know – and luckily, they are easy and quick. Don’t worry, I’m not trying to make you an accountant, but I am trying to give you a basic understanding of the financial drivers of your business.

First, a caveat – Never look at financial numbers in isolation. They should either be compared to the industry benchmarks and/or analysed over time as a trend.

Profitability Numbers

These are numbers, ratios and margins that tell us whether your company is making an adequate return. Adequate return is subjective – what is adequate to one person, one investor, one owner, one banker, or one industry?

Companies with a product or service that is easy to replicate or commoditise usually have low margins. Companies that have a competitive advantage or a barrier to entry usually have high margins. New products usually have a high margin to begin with, and as competition increases, the margin reduces.

1 Gross Profit Margin

This ratio tells us how much revenue is left over after paying for the product that generated the revenue.

Gross Profit Margin=Revenue less Cost of Goods SoldRevenue

Gross Profit

In the example above 40% of the revenue is left over after paying for the product.

This number is important (and arguably the most important) because it will quickly tell us if there is sufficient revenue to cover the selling and administrative costs or overheads.

Increasing sales or revenues alone without understanding and managing the costs will create cash flow problems and make you unprofitable. Just looking at the Gross Profit Margin will quickly tell you if you are in a good position.

2 Operating Profit Margin

Operating Profit Margin tells us how much profit the business is generating after taking into account both the cost of goods sold and the operational and administrative expenses.

Operating Profit Margin=Gross Profit less Operating ExpensesRevenue

For sole trader businesses, I suggest excluding owners’ drawings, wages and expenses. For example, if you run a cafe excluding the owner-related expenses will give you a better picture, as if the cafe is generating enough revenue to cover its running or operating costs. If the owner decides to pay themselves too much and their costs are included in the operating costs, the picture the Operating Profit Margin paints will distort the reality.

Operating Profit Margin is often confused with the ratio below – Net Profit Margin.

3 Net Profit Margin

The Net Profit Margin shows the profitability of the business after accounting for all relevant costs. It also shows the return to the shareholder or owner.

Net Profit Margin=Net ProfitRevenue

This ratio should be analysed over time, and you are looking for a consistent and strong ratio. Deterioration over time may indicate a period of abnormal costs or conditions. It may also indicate cost blowouts.

The ratio should be compared to the industry and/or the shareholder or owner’s expectation of adequate return. A low margin compared to the industry indicates a margin squeeze and that productivity improvements or initiatives are needed. A shareholder or business owner should expect a return representative of the risk of the investment.

Activity Ratios

Activity ratios tell the business how efficiently they are using their short-term assets (especially cash) and indicate operational performance.

4 Working Capital (Current Ratio)

The working capital ratio can give an indication of the ability of your business to pay its bills.

A stronger ratio indicates a better ability to meet ongoing and unexpected bills, therefore taking the pressure off your cash flow. Being in a ‘liquid’ position can also have advantages such as being able to negotiate cash discounts with your suppliers.

A weaker ratio may indicate that your business is having greater difficulties meeting its short-term commitments and that additional working capital support is required. Having to pay bills before payments are received may be the issue in which case an overdraft could assist. Alternatively, building up a reserve of cash investments may create a sound working capital buffer.

Net working capital can also estimate the ability of a company to grow quickly. If it has substantial cash reserves, it may have enough cash to rapidly scale up the business. Conversely, a tight working capital situation makes it unlikely that a business has the financial means to speed up its rate of growth. A Working Capital Ratio greater than 2 is usually considered desirable; however, it is a matter of balance.

5 Debtor Days

Debtor Days indicate the average length of time it takes from when you make the sale to when you receive payment. This measures how quickly and efficiently a business collects its outstanding bills.

A larger number of debtor days means that a business must invest more cash in its unpaid accounts receivable asset, while a smaller number implies that there is a smaller investment in accounts receivable, and that therefore more cash is being made available for other uses.

Debtor Days should be looked at over time to see if there is a trend. A long Debtor Days may indicate that customers are struggling to pay their accounts, or lax credit monitoring. Economic factors such as a recession may lengthen Debtor Days and may require a tightening of credit control processes.

Lower Debtor Days numbers are generally better. However, a low Debtor Days compared to the industry benchmark may mean your credit terms are too stringent and that you are potentially missing out on sales opportunities.

It is a useful exercise to list your debtors and then order them by how outstanding they are. This is known as an Aged Debtor Report. This report divides the age of the accounts receivable into various buckets, which you can sometimes alter within the accounting software to match your billing terms. The most common time buckets are from 0-30 days old, 31-60 days old, 61-90 days old, and older than 90 days. Any invoices falling into the time buckets representing periods greater than 30 days are cause for an increasing sense of alarm, especially if they drop into the oldest time bucket. This report prioritises the debtors that need following up, and accounting software systems often will also provide the contact name, email address and phone number.

6 Creditor Days

Creditor Days indicate the average length of time it takes your business to pay its bills.

Again, this ratio needs to look at a trend and be compared to industry benchmarks. A declining ratio may indicate a worsening working capital position due to a decreasing stock turn or lengthening debtor days.

7 Inventory Days or Stock Turn

The Inventory Days or Stock Turn shows how many days it takes for the inventory to be sold and replaced.

For service-based businesses, replace Average Inventory with Average Work in Progress.
A low Inventory Days may indicate positive factors such as good stock demand and management. It also means fewer resources (usually cash) tied up in inventory. However, a too low Inventory Days may be a sign that the inventory levels are too low and unable to support an increase in demand.

A high Inventory Days may indicate that either stock is naturally slow moving or problems such as obsolete stock or good presentation. A high Inventory Days can also be indicative of potential stock valuation issues.

A caveat – Inventory Days is very industry specific. An industry where the inventory is not perishable or go out of date, it may be appropriate to have higher Inventory Days. Likewise, where the goods are imported, and it takes time to replace inventory, it may be appropriate to hold more inventory, such as cars.

Liquidity Ratios

Liquidity ratios measure the business’ ability to meet its short-term liabilities. They are especially important to banks and creditors when applying for loans or credit applications.

8 Current Ratio

Current Ratio is also known as Working Capital Ratio and is discussed above. It indicates if the business can pay off its short-term liabilities in an emergency by liquidating its current assets.

A high Current Ratio indicates a good level of liquidity but if the ratio is too high, it may indicate other problems. The inventory levels may be too high, valued incorrectly, or include too much obsolete inventory. There also may be a high debtor balance due to poor credit control or too generous payment terms.

9 Quick Asset Ratio

The Quick Asset Ratio gives a more conservative measure of liquidity than the Current Ratio. The Quick Asset Ratio excludes inventory as the value of the inventory that is realised in a ‘fire sale’ situation would be a lot less than the book value. It should also exclude any prepaid expenses.

In the example above, the quick Asset Ratio greater than 1 indicates that current liabilities can be met from the current assets without having to liquidate inventory.

10 Cash Ratio

The Cash Ratio is like the Quick Asset Ratio but excludes any other non-cash current assets such as Debtors. It is the most conservative liquidity ratio.

The first step in any successful corporate turnaround is acknowledgement and acceptance that a turnaround process is needed, and that management has the energy and strength to work with a corporate turnaround advisor to make the changes necessary.

A few weeks into a turnaround process when turnaround activity is well underway and lots of different things are happening simultaneously, the management team may be overcome with a sense of being overwhelmed and losing control. So, how do you measure these feelings by knowing if your efforts are paying off?

I believe that you regularly need to sit down, take a breath, and reflect on the journey to date and where you have come from. Have your turnaround plan with you and look at the following elements of a successful turnaround:

Has a review been conducted and then control been taken of the most immediate and critical areas (cash management, arranging short-term funding, review of overheads, review of assets, financial reporting, tax obligations etc)?

Management team
Has a review been done of the senior management team, including the CEO? There are some key elements to this. For instance, if this team were the team to turn your business around, they should have done it before the turnaround advisor was engaged. Which of these people is not up to the task? Who does not have the skills or the attitude and energy required for a turnaround process? Changing management also communicates a powerful message of confidence to stakeholders and throughout the business in the turnaround process.

Stakeholder engagement
Most problems in this world are because of a communication failure, and fixing that communication failure will go a long way to resolving the problem. Talking to banks, investors, suppliers, staff and customers with what you are doing, and then delivering on what you tell them will build support and confidence in the turnaround plan.

Financial restructuring
The way the business is financed is often not fit for purpose, as was implemented at a different stage of the business journey. Are there changes needed to debt and equity, gearing of the balance sheet, and refinancing with a more appropriate facility?

Process improvement
Have the operations of all areas of the business been reviewed with the view to efficiency gains, and cost and time reduction? Tim Ferris, the author of The 4-hour Workweek, said,

“Never automate something that can be eliminated, and never delegate something that can be automated or streamlined. Otherwise, you waste someone else’s time instead of your own, which now wastes your hard-earned cash. How’s that for incentive to be effective and efficient?”

Eliminate. Simplify. Automate. Delegate.

Culture and operational changes
Reviewing what people do, how they do it, their attitude and energy, and then making changes and improvements will improve both operational performance and the culture of the staff and the business.

Strategic review
Once the crisis and emergency stage has begun and the business is more stable, it is then time to do a strategic review of the business and the direction it should be heading. This may include considering divestment, asset reduction, downsizing, outsourcing, investment, and organic versus acquired growth.

Upon reviewing these elements and the actions within your business to date, do you feel you are on the right track, even if it seems chaotic? Turnaround is not a linear process. Developing trust with your advisor and understanding these elements of a successful corporate turnaround should provide confidence in the turnaround strategy

Construction has the highest rate of company insolvency actions of any industry in Australia. 

When you add in sub-contractors and sole traders, the construction industry accounts for over half of all insolvencies in Australia.

The high use of sub-contracting in the industry creates a unique challenge.  The client will enter into a building agreement with a contractor.  The contractor has the responsibility for all work on the project but may subcontract parts of it out.  A house build is a prime example where the client engages a builder as head contractor and then the builder sub-contracts various parts of the build.  It is estimated that 90% of the construction work is completed by sub-contractors. 

Cost control is hard because there is also a lot of estimation involved. Sub-contractors are usually small businesses, and the work they do for the head contractor is often a large proportion of their revenue.  Small businesses also have difficulty accessing funding and do not have large cash reserves.

With this structure, the whole construction industry is susceptible to a domino effect.  When a head contractor becomes insolvent, the reliant sub-contractors may also face insolvency, which then affects their creditors. 

There are several avenues that could be explored prior to formal liquidation. An informal restructure or turnaround may stabilise the business, look at different funding alternatives, and create efficiencies and positive cash flows – if action is taken early enough. Directors may also place the company into voluntary administration. The administrator would look to enter into a Deed of Company Arrangement with the creditors that would enable the company to trade out of its troubles.  

However, a far less-utilised alternative is the Safe Harbour provisions of the Corporations Act. When enacting the Safe Harbour legislation, the government said it was aimed to foster a business culture of entrepreneurship and move away from an environment that penalises business failure.

The Safe Harbour provisions allow directors to trade while insolvent if the director develops one or more courses of action that are reasonably likely to lead to a better outcome for the company. Each company situation is unique but generally, it depends whether the director:


  1. properly informs themselves of the company‘s financial position
  2. takes appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company‘s ability to pay all its debts
  3. takes appropriate measures to ensure that the company is keeping appropriate financial records consistent with the size and nature of the company
  4. gets advice from an appropriately qualified entity who was given sufficient information to give appropriate advice
  5. is developing or implementing a plan for restructuring the company to improve its financial position


The Safe Harbour provisions only apply for the period that the Safe Harbour actions are being undertaken, and it is up to the directors to prove this in their defence of insolvent trading. It is also in the directors’ best interest to act early and implement and enact a Safe Harbour plan.   

There are several significant benefits of the Safe Harbour provisions for the company.  Control of the company remains with the directors, not the administrator, liquidator or receiver – all of whom work for the benefit of the creditors.  It is also a private action so other stakeholders need not know that the Safe Harbour provisions are being applied (unless required by other legislation such as ASX continuous disclosure rules).  Safe Harbour also does not have a legislated defined end date. Therefore, the Safe Harbour plan may go for many months, making it more likely to be successful.

  Because of COVID-19, the Australian government amended some of the insolvency laws to allow a period of trading while insolvent. In my view, this has – at best – just given companies in financial distress a bit of breathing space, but it does not resolve the primary underlying condition.

Construction businesses should investigate and consider Safe Harbour with other industry requirements. In Queensland, the licensing policy for builders includes the Minimum Financial Requirements (MFR) and Project Bank Accounts (PBAs). The MFR requirements are strict and therefore a company operating under the Safe Harbour provisions may not be complying with the MFR.  If the builder cannot hold a licence, the company would almost certainly be liquidated.  The PBA requires cash to be quarantined in a bank account and the builder will lose control, ownership and use of those funds.  Therefore, tighten the builder’s liquidity.


In September 2017, a new piece of legislation known as the Safe Harbour provisions was added to the Corporations Act. Safe Harbour provisions give company directors protection from insolvent trading penalties and an opportunity to pursue strategies that could save their struggling business.

Historically, Australian companies faced strict, creditor-centric insolvency laws where directors would call in insolvency administrators to absolve or limit their personal liability from trading while insolvent. The Safe Harbour provisions created some protection for directors from this personal liability, provided they undertook a restructure of the company that would have a reasonable expectation of a better outcome for the company – and not just the creditors.

It is not a carte blanche approach, though. To qualify directors need to

    • be closely monitoring and involved in the financial position of company and have: –
  • Paid employee entitlement on time; and
  • Have appropriate financial records which are kept up to date; and
  • Ensure no misconduct by officers and employees; and
  • Kept and maintained tax reporting records and obligations

develop a course of action that is reasonably likely to lead to a better outcome

The legislation does not define ‘reasonably likely’ or ‘better outcome’, nor has there been a judicial interpretation or legal precedents set. However, it is generally considered that an objective assessment is needed of the course of action to determine if it is reasonably likely to lead to a better outcome. This is where an experienced turnaround advisor is important, as the subjective opinion of the directors is not sufficiently meritorious.

I consider the start of entering a Safe Harbour as substantiation of the course of action through a turnaround plan assessed by the turnaround advisor as leading to a better outcome than entering voluntary administration. Note also that it must be the directors who need to develop and implement the plan. It is not the restructuring advisor’s plan, and without leadership and oversight by the directors, the plan will most likely fail. Also, ‘reasonably likely’ is when the decision is made to use the safe harbour provisions – not in hindsight.

The benefits of Safe Harbour are fourfold:

  • It gives directors time to undertake a restructure of their business, remove the risk of insolvent trading and achieve a better outcome.
  • ‘Better outcome’ is for the company and all its stakeholders including creditors, employees, customers, and shareholders. ‘Better outcome’ can mean that all these stakeholders will be better off, either by restructuring to make the company more viable in the longer term or preparing for a more orderly formal insolvency.
  • Safe Harbour can be completed in privacy. Formal insolvencies are done in public, which can have an adverse impact on the value of the company, the ability to refinance, and in some industries such as the construction industry, the ability to continue operating.
  • Safe Harbour requires the engagement of an expert restructuring advisor – a Safe Harbour specialist. The Safe Harbour restructuring advisor works with the directors to plan to save the business, and the more the directors work with this specialist, the better the chance of achieving the better outcome. The Safe Harbour restructuring advisor will help directors by:

    Working out the current financial position of the company
    Assisting with cash flow forecasting and management
    Ensuring directors comply with the requirements of the Safe Harbour provisions
    Contracting the restructuring vs liquidation outcomes
    Monitoring directors as they work according to their restructuring plan
    Monitoring the better outcomes test to maintain directors’ protection


The biggest factor in achieving a better outcome is engaging with a Safe Harbour specialist early. The Safe Harbour specialist will help the directors objectively decide if a Safe Harbour restructure is the right strategy for their company. The earlier they are assisting your company, the greater the chance of achieving a better outcome.