What businesses in distress can learn from Formula 1
Kevin Lamb CA considers whether the level of business distress affects decisions on risk taking.
The 2016 Formula One season is under way. Love it or hate it, F1 is a global sport with organisations that take huge risks both on and off the track to achieve the financial reward that winning brings.
When money is no object, does having a funding safety net encourage teams to take more risks in the pursuit of greater rewards?
When cash is tight and the pressure is on, do you play safe or take more risks to survive?
The Lotus F1 team, acquired by Renault in December, found itself experiencing significant distress to such an extent in the 2012/13 season that they couldn’t pay their drivers, which led to Kimi Raikkonen’s departure to Ferrari.
While racing drivers at this level are not generally on the poverty line and are more likely fuelled by a desire to win than money, when you have not been paid and a crashed car will cost your team a large sum of cash, how close to the limit will you drive? A broken nose cone alone can cost around £110,000 and at its most distressed may be enough to bring down a team.
Businesses in distress face similar dilemmas.
With limited resources the decision of where to allocate funds becomes more critical.
Does a business take the order from the customer with the poor credit rating as it needs the sales? The credit risk might be seen as essential, but a bad debt may be terminal.
Does a business manufacture bespoke stock on a speculative basis to keep the factory busy in the hope that an order will be received?
How soon should employee numbers be reduced to cut costs? What if that leaves the business short staffed should demand recover?
Can the business afford to invest in new technology?
In F1, failure to invest in new technology is the fastest route to the back of the grid so meticulous attention to resource allocation is essential.
Businesses in distress are no different. “Cash is king” is the mantra and should be the focus of management in any distress situation. Careful planning and analysis to assess the risks and returns of decisions will give management the best chance of minimising risk and maximising the reward.
The assistance of independent professionals should not be overlooked where best practice, benchmarking and an objective view can help steer a business through the process.
The 2016 F1 season will see many risks taken and great rewards for success, but underlying all the successful teams is a crew of experts planning, analysing and assessing each and every risk.
Kevin Lamb is a Chartered Accountant, Formula One fan and Restructuring Advisory Director with RSM, based in Scotland.
Any views expressed in this article are the views of the author and do not necessarily represent the views, policies or regulatory approach of ICAS.