By Ian Davison, Associate Director, Restructuring at Grant Thornton
“It’s only when the tide goes out that you learn who has been swimming naked”. As much as I would like to take credit for this quote, it was Warren Buffett who uttered these words.
Buffet’s words of caution are a metaphor that should be remembered by business leaders when considering their own business’ financial position.
If a business’ strategic plan is based on expecting a wave to come in, but instead the tide goes out, the future of the business could be at risk.
To avoid this scenario, management often need to take a step back and look at their business from a much more strategic level, including anticipating various changes to the landscape.
It’s easy to look at your business when winning new work and think that all is performing well.
However, management need to take a more holistic view, ask some fundamental questions and consider the following: is this work actually profitable, how will this impact the business’ cash flow cycle and how is it going to be funded, is this in line with the business’ overall strategic goals, and how will it impact the longer term future of the business?
Take a look at some of the recent high-profile business failures. From the outside, things may have appeared to be going well, with prominent work wins, and often the appearance of a successful growing business.
However, when the tide went out, the problems began to surface. When considering Warren Buffet’s phrase, not only were some of these businesses swimming naked, they were doing so on a busy beach.
This is an important message for all industry sectors but is especially relevant for the construction sector where contract values are often high, profit margins are low, and very punitive provisions for failing to meet contractual obligations are common.
Even worse, these provisions are often not fully in the control of the business (eg a sub-contractor failing to deliver on their own obligations). What at first seemed like an exciting opportunity can quickly turn into an onerous contract and could prove to be fatal for even the largest of construction companies.
Similarly, from a personal finance point of view, the sentiments are the same.
Look at the bigger picture. Consider the peaks and troughs of the market when purchasing property and how sustainable repayments on finance agreements are, should circumstances change.
I have previously been asked “How can they go bankrupt? They own 10 houses and a Range Rover!”. The answer to that question is of course, because they had 10 houses and a Range Rover!
Business leaders should take steps to prepare for changing conditions, so they don’t get caught when the tide goes out.
For further information or advice, Ian Davison can be contacted at ian.davison@ie.gt.com
Grant Thornton (NI) LLP specialises in audit, tax and advisory services.