Companies don’t fail overnight – if you spot the signs, you can avert disaster, writes Sandra O’Connell, The Sunday Times

Paul Quinn has been through the best of times and the worst of times as a hotelier. He steered his family’s Fairways Hotel in Dundalk to success in the 1990s. By 2001, business was so good that he launched a €10 extension to the hotel. But then came September and the attacks on the World Trade Centre in New York. Overseas bookings collapsed.

Domestic bookings were no better, thanks to the foot-and-mouth crisis of the same year. “We simply couldn’t do business,” said Quinn.

Yet he managed to turn a €600,000 loss in 2001 to a €150,000 profit three years later. The hotel remained in profit until it was sold in 2006. “So I know how it’s done,” he said.

This means the owner of Quinn Hospitality Consultants is well placed to advise clients on the indicators that a business is in distress. “Having been through it myself, I know what those signs are,” he said.

Today he shares his knowledge with hoteliers beleaguered by difficulties such as the credit crunch and drooping consumer confidence. He has even published a list of “warning signs” on his company website, www.qhc.ie.

“One of the most obvious signs that something is wrong is where wages have crept up over recent years to account for, in some cases, 40% of a hotel’s turnover. That doesn’t leave a person much room to manoeuvre,” said Quinn.

The key to redressing the balance is to use staff more efficiently rather than simply looking to make redundancies.

“Don’t have a barman standing around doing nothing if he could be helping feed people in the function room. You need to be creative about how you employ people to cut overall costs,” he said.

Many hoteliers are slow to react to falling occupancy rates. “Too many will say they can do nothing about it, yet they don’t use their existing client database as a sales and marketing tool.”

The biggest signal of all, however, is cash-flow difficulties.

“Alarm bells should be ringing like crazy if you’re having difficulty paying your VAT or your PAYE – I’m speaking from experience,” said Quinn.

“With the benefit of hindsight, what I would do differently is to squeeze my debtors rather than let my debtor days run.”

“In turning the Fairways around, I went over every aspect of the costs and revenues with a fine-tooth comb looking for ways to make savings. I had to use my imagination, but I did it.”

Companies across all sectors are likely to try to follow suit. According to figures from Farrell Grant Sparks, a financial advisory firm, corporate failures in Ireland were up 77% in the first half of this year on the same period last year.

Few of these failures will have come as a surprise to their owners, however.

“It is rare that companies find themselves in a situation where, out of the blue, the bomb goes off,” said Michael Phelan of Baker Tilly Ryan Glennon, an accountancy firm.

“In most instances, failure arises from initial financial problems that increase over a long period and from an obvious chain of events.”

There is often a reluctance on the part of the owner to admit to a problem and to seek help.

“Many businesses are established by entrepreneurial salespeople, engineers, IT Specialists and professionals,” said Phelan.

“Entrepreneurs, by nature, are optimistic and many are highly skilled in their respective specialities. However, they often lack experience in finance and management, are not equipped to control growing companies, worse still, run companies whose growth has stagnated or begun to decline.”

The warning signs are often obvious to outside observers, whereas pressure pressure builds within a company imperceptibly, he said.

“The owner is preoccupied with fending off creditors, chasing debtors, squeezing supplier credit lines, not replacing staff and juggling cash flow,” said Phelan.

“An outsider would immediately recognise the severity of problems that have become the norm. In contrast, directors see the difficulties as, at most, temporary. They will be resolved when the big order lands or when the assets are refinanced.”

Problems caught early are often easier to remedy and improving financial management can be the way to do this.

“Lack of reliable information and awareness of the current financial status of a company can lead to unsound business decisions,” said Phelan.

“These add to the company’s problems and my ultimately accelerate its demise.”

Warning signs he looks for include tightening margins, a turnover that is below expectations or projects that exceed budgets.

Other indicators include delays in producing financial information, or event a total lack of data.

Any inaccurate reporting of revenue and cost flows in the accounts, leading to a distortion of gross or net margins and profitability, should be focused on, as should divergences between a company’s gross or net margins and those of its competitors.

“Deteriorating cash flow is the most obvious and yet the most ignored danger signal,” said Phelan.

“Obvious signs of this include reductions in turnover or in debtor collection rates, delaying payments to trade creditors, or making payments on account; seeking alternative sources of supply or delays in making returns to the Revenue.”

Companies are run by people, he points out, and when problems manifest themselves, emotions take over.

“This is particularly the case where small to medium enterprises are run by the entrepreneurs who set them up,” said Phelan.

“They cannot bring themselves to admit their venture may fail and blinker themselves from commercial reality, convincing themselves they can solve the problem by simply spending more time at work.”

If you do not take action until you are in such a position, you may already be too late, suggests Paul Davis of Davis Business Consultants, which specialises in business turnarounds.

“By the time an owner-manager can’t pay wages or creditors, he or she already knows they are in financial difficulty,” said Davis. “There are even earlier warning signals that should have been heeded. Unfortunately, this is the stage at which the owner still tends to believe that one big order will sort everything out.”

One of the first things he looks for in a company about to run into difficulties is an order book that is slowing up, even slightly. It’s at that point that questions should be asked.

“A second sign, which is even less likely to be picked up, is poor staff morale,” said Davis.

“One of the most important parts of a turnaround is bringing staff on board and getting them more involved. Staff love it and buy into it, but too many owners don’t place enough value on their input to do this.”

Finally, keep an eye out for any rise in customer relations issues.

“Where a business hasn’t worked to nurture the customer relationship, and kept abreast of the changes in their customers’ business, the alarms should sound.”

“They may not realise it but they are storing up trouble for their own business further down the track,” said Davis.