Checklist for the Signs of Distress
There are numerous possible reasons for a China venture to find itself in distress, and frequently there are multiple causes at play simultaneously. The aim of management must be to detect the signs of distress early and not only take action but take action quickly and decisively before the problems become unmanageable. The longer it takes to make course corrections, the more dire the situation becomes and the fewer options available. Often this action involves managing or revitalizing relations with your local Chinese partner or vendor, who may have partly contributed to the problem. Sometimes the problem is the changing regulatory or legal environment, and determining how best to react decisively to these changing circumstances will be the key to turning an underperforming enterprise into a success.
A number of tell-tale signs can indicate a venture is in distress. These signs can variously point towards the underlying internal and external causes of the distress; management skills, product quality or competitiveness, shifting market trends, ineffective channels, criminal activity, ineffective or confusing communication, shifting priorities, regulatory barriers, and so on.
Tell-Tale Signs of Distress:
- Deterioration in relationship with your local partner, vendor, buyer or affiliate
- Reduced sales, loss of key customers, growing inventory, growing number of returns
- Deep discounting / discounting to secure orders earlier than normally scheduled
- Declining forecasts, complaints about competitor in-roads
- Progressively tighter cash constraints that cause delays in payment of staff, vendors, and overhead
- Late financial statements and declining A/R A/P indicators (days outstanding)
- Frequent changes in auditors
- Mounting regulatory costs and barriers
- Production schedules growing erratic; periods of intense activity, overtime, and rush shipments followed by inactivity
- Growing reluctance of vendors to supply product or service / demands for prepayment
- Staff issues: increasing staff turnover especially at higher levels, or staff that used to offer suggestions falling silent
- Change in communication styles (communications become increasingly urgent, confrontational or guarded)
Some of these symptoms are insidious and develop slowly over time before they can be perceived as a genuine trend that raises alarms. Others, such as cash flow, normally provide a more timely insight to the state of the venture. This being said, even cash flow can be misleading in ventures that have large seasonal swings in revenue such that genuine problems are masked by seasonal doldrums that a company has come to expect.
With our years of experience in the Chinese markets as well as with Chinese law and officials, IPO Pang is ideally situated to aid distressed foreign ventures in China. We welcome you to contact IPO Pang to discuss your situation, our services, and your options.