It’s a reality that a considerable number of businesses in Australia are experiencing, or about to experience, financial stress. If you haven’t seen a copy of the latest SV Partners Commercial Risk Report I highly recommend you take a peek (available here), for those of you that have, the concept of rating businesses from 1 (high risk of financial default) to 10 (lowest risk) will be familiar. A summary of data for 1.7 million Australian businesses in early Sept 16 is shown.


The big question is how to help businesses that are in need?

Approaching an Individual Business Assessment

Every business is different, with the extent that varying internal and external factors come together to impact its overall position needing to be understood before strategies can be developed and implemented to improve risk. Many business assessment tools provide an overall rating score which can mask serious, or potential to have significant impact in the future if not currently serious, aspects of the business that are underperforming or destabilizing the overall platform on which the business is preparing to grow.

Business assessments need to be broken down to consider five key areas individually, and then prioritized into a sum of their parts to produce effective recommendations for diminishing current and future risk.

  1. Market position, market performance and direction
  2. Products and Services – Customer fit
  3. Internal operational efficiency
  4. Financial performance and working capital
  5. Culture and organizational structure/performance
  1. Market position, market performance and direction

It is useful to consider this aspect of the business first, as it can set the scene for the prioritization and direction of improvement strategies in all other aspects of the business. If there are issues with this area of the business’s positioning, or ability to achieve further growth, then thinking about these factors first may influence responses to later questions to incorporate the ability to respond to general market performance issues.

The business needs to reflect carefully on what market(s) it operates in, both structurally and geographically. It is important to know what changes have been occurring in this/these markets recently and what the outlook is for the market sector as a whole (technology disruption, pricing commoditisation, barriers to entry and the frequency of the appearance of new entrants, or disappearance of older players, and the power of suppliers to the business to influence the ability to execute growth strategies).

  1. Products and Services – Customer fit

This section should examine more closely the specific products or services the business is offering in the market sector considered above. The questions should give a perspective on how effectively the business sees its core activities in the delivery of products or services matching the needs of its target customers and areas that are already known to need improvement. Often businesses coping with some degree of operational or financial stress do not regularly review the needs of their customers and change the products or services they offer to better fit with changing customer requirements.

  1. Internal Operational Efficiency

Having now thought about the market the business operates in and the products and services being offered to target customer groups, focus should now shift to the business’s internal operational efficiency. This section should identify if there are any particular areas or processes within the business that are holding the business back. The idea then being to target solutions to dealing with them. Areas of the business that should be considered include the environment (offices or other premises such as warehouses or manufacturing facilities), the physical equipment being used and other facilities required to produce the product or service, the IT that sits behind the business and provides the communication and financial platform to the activities of the business, the skills and experience of people within the business and also senior management capability and skills. All of these aspects will need to come together to determine the overall efficiency of the internal operations of the business, and more importantly the ability to achieve improvements. People, skills and culture which are also an important aspect of operational efficiency will be addressed in more detail in section 5.

  1. Financial Performance and Working Capital

Many businesses can excel in product and service delivery and growth in target markets but still fail because of poor financial management or lack of adequate financial planning, especially working capital requirements for growth. This section needs to determine the extent of the businesses current, and future requirements for, management of its finances and planning for the future including the existence, or otherwise, of a current business plan and financial forecast, understanding of any seasonality in cash flow and strategies in place to deal with it, cost controls and effective return on assets and the use of working capital. Moving into rapid growth without fully understanding its cash flow demands and how this will affect the overall availability of working capital to fund the essential activities of the business can rapidly lead to financial distress.

  1. Culture and Organizational Structure/Performance

Finally, the business needs to reflect on its culture and organizational structure and performance and how this fits with the required efficient delivery of products and services. Particularly when a business is planning to introduce change, the enthusiasm and acceptance of the need for that change by senior staff, and their ability to manage it, are key factors in determining its success. The ability of the organizations culture to also embrace change rather than resist it, have the skills to efficiently deliver the products and services currently required as well as those planned as part of any growth strategy also need to be assessed and addressed to ensure the business is capable of moving from where it is now to where it needs to be.

Pulling it all together

Once the business has completed the various sections of the questionnaire, a risk rating can be more effectively allocated to each of the five areas to give an overall view of the main areas within the business that need addressing. Then work with the business on each of these sectors to identify the potential solutions and strategies that could be implemented to address the concerns and then bring them all together to identify:

  • key priorities for the immediate term,
  • things that can wait but still need to be executed in the short term, and
  • those challenges or opportunities that will form part of longer term strategies

Article written by Sheree Cross

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