Menu
In the past years, many prominent companies including Arthur Andersen, Bata, Delta Airlines, Dunlop, Enron, Kodak, Marks & Spencer, Nigeria Paper Mills, Nokia, Savannah Bank, Société Générale, etc have all experienced failure. While some failed partially, some experienced corporate disastrous end. Corporate failure is not something palatable, and every worthy organizational leader will strive to avoid it. Any corporate action that may threaten the going concern of a business, erode its corporate image, or result in a dramatic end should be avoided.
Corporate failure represents the discontinuation of company’s operations occasioned by weak corporate governance, incompetence, and bad investment strategies, leading to inability of the company to earn sufficient inflows to offset operating expenses. It occurs when a company becomes bankrupt and goes out of business. In a business environment, corporate failure is quite common, but only those businesses with working governance system and that are adaptable to market changes, do survive the storm. However, it is noteworthy to mention that most corporate failings are self-induced and internally orchestrated.
Corporate failure can be caused by several factors including:
This is a direct consequence of lack of collaboration, experience, managerial skills in relation to strategic thinking and capability. It is occasioned by the inability of the management team or the board to demonstrate the requisite leadership, vision, and expertise to pilot the affairs of the organization. It also implies weak management control over the workings and effective coordination of business activities. When the organizational leadership team is poorly structured, it may result in a situation whereby people or individual within the organization are allotted positions where they are incompetent. Poor leadership team can produce toxic working atmosphere, demotivated workforce, and hence may threatened the going concern of the business.
A working leadership team recognize their areas of shortfall and quickly respond to fill the gap. They create a conducive working environment that motivate, attract, and enable employees to develop creative and innovative ideas to solve business problems. They also empower their people through relevant trainings in evolving technologies to enable them initiate novel ideas to discover new markets and improve market competitiveness.
Globally, during the period of economic downturn, some businesses may fail and unable to rise again. The decline in the economy may lead to the reduction in the volume of activities, which may adversely affect the performance of many companies. During this turbulent period, companies usually find it difficult to operate at a level that will enable them to maximize returns to offset their financial obligations as they become due.
Bad economic conditions usually incapacitate and impair the ability of companies to generate increasing revenue. Because it creates a situation that is not within their immediate control and hence, render many companies helpless. You can imagine the level of financial wreckage occasioned by the economic meltdown of 2008 when billion-dollar investments were lost to market crash. The COVID-19 pandemic took everybody by surprise in the year 2020 when the global business was lock down for several months.
This is triggered by lack of board effectiveness, unhealthy company culture, inappropriate incentives, board’s risk blindness arising from skills limitations and competence, and the inability to effectively monitor and control senior executives. When the corporate governance system of a company is weak, things will be done anyhow. There will be no proper coordination of affairs of the business, resulting from poor leadership. The internal controls system will be very weak and lack the requisite capacity to adequately check frauds, financial leakages, and other irregularities. Weak corporate governance generally results from the board of directors saddled with oversight responsibilities, but with little or no experience in the core business areas.
The importance of technology in today’s business cannot be overemphasized. The 21st century businesses require digital transformation to be competitive in the marketplace. Technological tools can be integrated to improve operating efficiency, promote corporate image, and generate increasing revenue. Many aspects of our lives are now interconnected with online activities.
Therefore, succeeding in digital age required considerable knowledge in evolving technologies including artificial intelligence, machine learning, big data analytics, internet of things etc. However, integrating the requisite technology and keep maintaining the system will require high level of expertise and technically skilled professionals. Hence, if a company fails to leverage on evolving technologies, it may become laggard in the industry and unable to outperform its competitors, and its ability to remain in business may be significantly impaired.
Company’s previous bad investment decisions that failed to yield the anticipated returns can also result into corporate failure, especially where significant amount is involved. Companies borrowed funds to finance investment opportunities with the expectation that the project will generate sufficient cash flows and superior returns in excess of its cost. If the investment fails, and the company is unable to settle its financial obligations, it may result in dilution of ownership and control. Then the going concern of the company may become threatened.
Working capital is the difference between current assets and current liabilities. It is the amount required for the day to day running of a business. Whereas working capital management represents the efficient and judicious management of each component of current assets and current liabilities including inventory, account receivable, cash, prepayment, account payable etc. to ensure liquidity of a company. The essence of working capital management is to ensure that sufficient cash flow is available to meet short-term financial obligations (liquidity).
Cash is regarded as the most liquid asset of any organization. Hence, companies should maintain adequate cash level to meet the day-to-day running of the business. The cost of running out of cash may be damaging to the business including not being able to pay debts as they become due. And if a company consistently fails to pay its bills as they fall due, it can have serious operational repercussions and its ability to operate on a going concern basis may be impaired.
Therefore, efficient working capital management will guarantee smooth financial operations and help improving earnings and profitability of a company. Excessive investment in working capital should be avoided. Rather, such idle funds should be invested in short-term marketable securities to generate additional returns.
Poor infrastructure, epileptic power supply, widespread insecurity, lack of good transportation system, etc. usually create additional and increasing costs for companies, especially in developing countries. When the costs become unbearable, companies may decide to close the business or migrate to another country where all these facilities are readily available.
Frequent change in regulation including multiple taxation, inadequate access to finance, inconsistent government policies etc. can propel companies, particularly the multinational organizations, to withdraw their investments when the operating business environment become unfavorable. Also, political turmoil, militancy, banditry, insurgency, etc. may threatened the corporate existence of a company. These factors impact on the company negatively beyond the control of its management and hence, the inability to continue business on a going concern basis.
Corporate failure did not occur overnight. The signs are always there. But it requires the management’s ability to identify and put in place mitigating measures to prevent its occurrence. The following are some of the red flags or symptoms of corporate failure:
When a company is struggling to pay its debt as they become due, or the financial performance of the organization is on a downward trend year on year, or when profitability ratios such as return on capital employed, profit margin, or return on asset are constantly declining, it is a red flag to corporate failure and action should be taken as immediate as practicable to avoid a corporate catastrophic outcome.
At Adda, we help businesses develop robust governance system to tighten leakages and improve performance. We can collaborate with you to design requisite strategies to preclude corporate collapse.
At Adda, we pride ourselves with highly experienced and committed professionals willing and ready to collaborate with businesses to create value
info@addalli.com
Postal Code: 100213
All Seasons Place, 74 Ogunnusi Road, Ojodu Ikeja, Lagos