Red flags - how to recognize and respond
to the early signs of business failure
By Shabnam Ansari
Head Strategic Planning- Nexus Insurance
Agenda
Frequent factors for SMEs’ failure
Early warning Signs for management
Early warning Signs for the board
Remedial Proactive Actions
A Quick health check
Agenda
Frequent factors for SMEs’ failure
Early warning Signs for management
Early warning Signs for the board
Remedial Proactive Actions
A Quick health check
Internal Factors:
 Poor Management- Failure to identify problems/take actions
 Personal Expenses/without business analysis
 Fraud and collusion, lack of controls
 Dependence on single supplier/customer
 Aggressive Growth or Complacency
 Lack of proper research
 Poor Financial Management
 Lack of Succession planning
External Factors:
 Economic Recession
 Natural disasters
 Government regulations
 Environment protection,
 International developments.
 What can you do
 Well managed
 Well protected
 Well informed
Agenda
Frequent factors for SMEs’ failure
Early warning Signs for management
Early warning Signs for the board
Remedial Proactive Actions
A Quick health check
Lack of Clear Direction:

unproductive activity

complex control mechanisms

unnecessary staff/ elaborate computer systems

Lot of form without function
Failure to face Growth

People Seem over their heads

Sense of inadequacy/more efficient competitors

Lack of clarity about roles and responsibilities

Excessive number of meetings to review routine

Lack of clear communication

Lack of trust & coordination
Complacency

Insistence on doing the things same way

There is a fear of taking risks.

People ask fewer questions;

Reject outside criticism,

Arrogance/ criticize competition.

Some people are “experts”
Excessive Changes

Frequency major shifts

Average tenure ,

Survivor mentality /Turnover

low employee morale/ disorganization
Living with poor Performance
 Performance reviews- raises for all
 Genuinely weak performers seldom fired
 Unusual reporting relationships
 Independent & aggressive problem solvers feel unwelcomed.
Poor Communication
 Unwillingness to listen
 Too many bad surprises
 Infrequent and poorly run staff meetings
 Critical attitude to discourages people
Agenda
Frequent factors for SMEs’ failure
Early warning Signs for management
Early warning Signs for the board
Remedial Proactive Actions
A Quick health check
Management & Internal Structures

Beware of Autocrats or dictators

Check for balance/complementary skills

Lack of Proper Succession Planning ,

Be alert to Staff Turnover – too high or too low

Management that focus on the past / Advice is ignored
Financial Issues

Debtors- outside trading terms , Creditors/suppliers-“cash only” terms

Review Business plans and financial statements,

Question Inadequate or absent management reports

Check Long term finance, Ensure good financier relationship

Query Excessive remuneration
Marketing and Products

Be aware of Cyclical markets

Monitor product quality, Consider Adequate marketing

Challenge Lack of product development

Be alert to declining sales / Rising costs

Do not put all your eggs in one basket
Basic Mistakes

Approach Big projects with caution!

Improper Acquisitions- digestion

Unsustainable growth/peaks

Question anything that’s too good!
Polly Peck International- PPI
History: Polly Peck- a small textile company
Polly Peck International 80’s flourishing Empire, 200 co.> 17,000 staff
Collapse: October 1990- PPI forced into liquidation-debt £1.3bn.
Asil Nadir- found guilty of theft - £ 150m, 10-years in prison
What went wrong: a case book- famous for its underlying reasons

In-organic growth- too sudden too extreme

Serious Governance issues- corporate power in one hand

Over leveraged- total- £ 1.3 bn, £100 mn- Short term

Lack of proper Accountancy/ financial statements
Agenda
Frequent factors for SMEs’ failure
Early warning Signs for management
Early warning Signs for the board
Remedial Proactive Actions
A Quick health check
Remedial/ Proactive Actions
Board and Management to work closely

Well-developed corporate governance and management practices are basic defense

Separate roles, avoid concentration of powers, active majority non-executive directors.

Management is accountable for performance, Board’s responsibilities- oversee management.

Work together & monitor progress.
Independent Advice

Initial internal assessment – Co’s accountant

Independent external assessment

Better than to be assessed by financiers
Remedial/ Proactive Actions
Define Direction.
 Initiate strategic planning process
 Link Strategic and Business Plans
 Annual/monthly goals & Measurements
Business Controls & Information Systems
 True depiction of financial position
 Recognized & best accounting principles
 Controls, risk management & compliance
 Business Monitoring KPI/regular feedback
 MIS reports- relevant, user-friendly & timely
Remedial/ Proactive Actions
Managing Stakeholders & Effective communication.
 Employees- two-way communication/ regular meet/ direct link to CEO’s office
 Others- customers, partners, media, etc.
 Listen to the Market!
Take Quick decisions:
 As soon as notice any sign
 Investigate
 Prepared to take major decisions
 Corrective action ASAP
Agenda
Frequent factors for SMEs’ failure
Early warning Signs for management
Early warning Signs for the board
Remedial Proactive Actions
A Quick health check
External
Internal
Customers
Management
Loss of regular customers
Large unpaid invoices, bad debt losses
Customer complaints piling up
Market, competition
More intense competition, new
competitors
Falling market share
Declining sales
Increasing price pressure
Suppliers
Declining delivery reliability
Suppliers offer poor conditions
Insistence on payment in advance
Lenders
Worse terms offered
More frequent business development
reports required
More collateral demanded
Credit curtailed
Attitude "But we've always managed like
this"
Unclear responsibilities
Decisions repeatedly postponed
Uncoordinated management
Burn-out with nothing to show for it
Staff
Unable to fill key positions
Staff not working to full capacity
Employees discuss internal problems with
customers/business partners
Increased turnover of staff
Lower than normal turnover of staff
Rising absenteeism
Finances
Dwindling liquidity reserves or cash flow
Maximum available credit used more
frequently
Unable to benefit from early-payment
discounts
Getting harder to pay invoices on time
Thank you
Shabnam Ansari
Head Strategic Planning- Nexus Insurance