Business In Distress

Question 1

What are some benefit of a rescue plan?

Answer 1

Preserve investments for shareholders
Retain jobs for employees
Creditors may receive bigger portion of what they are owed
Complete work in progress for clients
Tax may be paid to SARS
Debtors will still be in business

Question 2

What is commercial insolvency?

Answer 2

Inability to pay debts or probably be unable to within the next 6 months

Question 3

What needs to be in a business rescue plan part A?

Answer 3

1. List of material assets
2. List of creditors
3. Probable dividends that would be received by creditor under liquidation
4. List of shareholders
5. Statement whether the plan includes proposal made informally by creditors

Question 4

What is in the business rescue plan part B?

Answer 4

1. Ongoing role of the company and the treatment of any agreement
2. Property of company that is to be available to pay its creditors claims
3. Benefits of adopting the plan as oppose to under liquidation
4. Effect of plan on holder of securities

Question 5

What is in the business rescue plan part C?

Answer 5

1. Statement of conditions that must be satisfied for the plan to come to operation
2. How the plan will affect employees
3. The circumstances in which plan will end
4. A projected financial statement for next three year

Question 6

What a some turnaround strategies?

Answer 6

1. Managerial restructuring
2. Operational restructuring
   
   • cost reduction
   • revenue generation
3. Asset restructuring
   
   • asset divestment
   • asset investment
4. Financial restructuring
   
   • debt
   • equity

Question 7

Identify and describe the possible ways in which a company could improve its future cash flow and liquidity position.

Answer 7

1. Replace overdraft with long term finance
   - Overdrafts are short term loans and can be revoke at short notice by banks. Companies should explore longer term finance to provide sufficient time to repay capital and avoid any potential liquidity issue
2. Reduce inventory level
   - do research in what the customer requirements are or buying or selling inventory on consignment
3. Reduce the level of operating expenditure
   - reconsider bonuses, high advertising expenses and hedging any foreign exchange exposures
4. Improve collection of debts
5. Extending long term loan
   - using assets as collateral in order to negotiate a lower interest rate
6. Shareholder support
   - rights issue or injection of shareholder loan will improve gearing position
7. Sell unprofitable operations
8. Sale and lease back assets
9. Utilization of trade creditors as a source of finance
10. Instead of cash bonuses company should consider giving share options

Question 8

Identify and describe the action that a company could consider as part of a turnaround strategy to alleviate the cash flow pressure in the business.

Answer 8

1. Tighten credit terms
2. Reduce operating expenses such as marketing or increase advertising to stimulate growth
3. Reduce bonuses or give share options
4. Invest in new technology to improve productivity
5. Negotiate less strict payment term with creditors
6. Reduce investment in inventory
7. Factoring their debtors book
8. Negotiate better purchase price
9. Limited dividend payout
10. Leasing as source of finance