TO WHOM IT IS ADDRESSED

We address companies in any sector that are subject to "Business Crisis" problems. In particular, our attention is focused on all the subjects that can intervene to manage "Business Crisis" issues, such as:

• Internal decision makers (Owner, CEO, CFO, ..)
• External consultants
• Accountancy firms
• Banks, Insurance Companies
• Other external parties involved

THE IMBALANCES OF THE BUSINESS CRISIS

The type of Business Crisis issue we address is the Financial Crisis, which in Italy translates into “Crisi di Impresa”, as defined by the New Bankruptcy Law (Legislative Decree  no. 14 of 12 January 2019) and includes:

• Income imbalances
• Financial imbalances
• Asset imbalances

BUSINESS CRISIS: DEFINITION, ACTIVITIES AND CAUSES

A business crisis is commonly understood by the new Bankruptcy Law to be "a state of economic-financial difficulty that makes it probable that the debtor will become insolvent and that, for businesses, manifests itself as the inadequacy of prospective cash flows to regularly meet planned obligations".

The causes of Business Crisis can be:

• Internal
• External

In turn, there are mainly four kinds of internal causes:

• Crisis due to inefficiency: this type of crisis refers to the pathological situation in which the company finds itself, linked to the poor coordination of the company's functions or areas, which leads to returns and costs that are no longer in line with those of its direct competitors
• Crisis due to overcapacity/rigidity: this type of crisis is economic in nature and derives from a strong and lasting fall in the volume of business demand generated by the maturity or decline of the sector or by incorrect marketing choices
• Product decay crisis: this is due to the loss of the company's market share, but mainly to other factors, e.g. reduction in gross industrial margin
• Crisis linked to strategic errors and organisational inertia: this type of crisis derives from the company's poor ability to direct its overall behaviour, in order to maintain coordination with its benchmark environment and to respect the constraint of structural efficiency

External causes, on the other hand, can be linked to multiple factors that change in relation to the external environment, the period and the correlation between the environment and the specific nature of the Company.

THE OBJECTIVES OF BUSINESS CRISIS MANAGEMENT: EVALUATION OF THE CRISIS

The management of business crisis identifies two distinct objectives depending on the historical moment:

• If the crisis is not yet underway, the objective of crisis prevention is pursued by analysing the probability of company default in subsequent years
• If the crisis is already underway, the objective of Crisis Mitigation is pursued, by identifying the correct tools to eliminate or reduce the crisis

In particular, the first objective was concluded in Italy with the latest Cerved Study which, taking up the New Bankruptcy Law (Legislative Decree no. 14 of 12 January 2019), defines four main areas of business crisis assessments.

• Crisis due to Profitability, intended as the company's inability to produce cash flows in relation to the assets invested.
• Crisis due to Financial Structure, intended as the reduced weight of Shareholder equity contribution compared to third parties (Banks, Suppliers, Treasury, Personnel).
• Crisis due to Debt Sustainability, intended as the Company's objective difficulty in meeting the Debt Service.
• Crisis due to Financial Equilibrium, understood as poor company solvency in the short to medium term.

Cerved's study takes its cue from the European Regulations known as "Basel" (and subsequent ones up to "Basel 3") which defines the creditworthiness rating of companies (from 0 to 12 points) on the basis of the following four accounting indices:

• Coverage ratio of net fixed assets, defined as the ratio of the sum of shareholders' equity plus medium/long-term liabilities to net fixed assets.
• Degree of Financial Dependence, defubed as the ratio between Net Equity and Invested Capital.
• Incidence of Financial Charges, defined as the ratio of Financial Charges to Production Value.
• Liquidity generated by operations, understood as the ratio between the sum of the financial year result plus depreciation, plus provisions, plus write-downs and invested capital.

The Cerved Study and the Basel III Principles were developed on the basis of extensive Financial Literature on Business Crisis, which also presents other cornerstones such as the S&P Rating and Altman's Z-Score.

In any case, the common denominator of all this financial literature is the strong anchorage to accounting rather than cash.

BUSINESS CRISIS: TYPE OF OPERATIONS CONSIDERED

The Financial and Corporate Operations that Atena and its Partners consider, with the help of the Platform "Finance Atena", to support Company Business Crises, are:

• Data Compliance and Certification: which includes all the initial activities of verifying Corporate Data and defining a correct Methodology to certify the Data.
• Corporate Valuation As Is: which includes the complete and detailed forecast of the Company's Income, Balance Sheet and Financial Situation, maintaining the initial assumptions unchanged:
  • Both from a Cash Flow perspective
  • And in terms of Accounting
• Risk Assessment: which includes identification of the specific crisis centers that the Company is enduring, in terms of:
  • Direct impact on the Company
  • Crisis ramification and probability of deterioration
  • Causes
• Crisis Management Plan: definition of the short-medium term Crisis Management Plan which includes the following activities:
  • Determining the Crisis Management Team and their assigned roles
  • Identification of activities to eliminate the crisis
  • Identification of activities to mitigate the crisis
  • Internal Company reorganisation
  • Reorganization of relations with third parties (suppliers, customers, banks)
• Relaunch Plan: definition of the Company's long-term Relaunch Plan which includes:
  • New Business Idea to relaunch the Company
  • Market Analysis and complete Marketing Plan
  • Business Plan forecast in relation to the new Assumptions and comparison with the As is situation
• Ex-post Monitoring activities: definition of the methodology, tools and alerts to monitor the company's situation in future years with specific regular frequency.

THE BUSINESS CRISIS IN ITALY:

The "Business Crisis" in Italy is affected by the influence of European Regulations and by an approach that is still extremely backward, mainly in accounting, in which the status quo of the Balance Sheet and Income Statement items is defined and, on this, the sustainability and profitability of the Company are assessed, through the main accounting indices.

The cash flow part, i.e. all the cash flows that the company proposes, is only mentioned in a summary and passive way. In practice, accounting and cash transaction are considered to be more or less identical.

The reason why cash flow is so poorly considered stems mainly from the unit of time involved in the analysis. Most Business Crisis Analyses are in fact annual and in any case never go into monthly detail. In this way, 95% of the Company's cash movements cannot be taken into account; therefore, Cash Flow is practically not taken into account.

In addition to Cash Flow there is also the systemic part which is underestimated. This is the part that concerns the context variables such as: the fiscal part, the macroeconomic part, the stakeholder analysis and the possible risks that can affect the business model in the different possible scenarios and is fundamental to define predictive analysis. In particular, the current Enterprise Crisis Analysis does not take into account its own future Risks, which must instead be included in the Profitability Analysis by means of NPV and IRR.

In conclusion, Business Crisis Analyses, which are predictive analyses, are today almost entirely defined with forward-looking parameters.

The result? A completely unreliable sustainability and reliability forecast!

This fundamentally flawed approach, has been sustained over time by an increasing number of sudden business crashes in Companies that were considered solid but only in appearance.

Today this is no longer possible and, if we want to remain competitive and sustainable, we must be prepared to identify and deal with possible crisis situations in good time. The spirit of self-preservation that every company should have requires that and, from now on, so does Italian law, through the New Bankruptcy Law that defines the 2 key principles of crisis management:

• Early identification of the crisis
• Timely activation of Correction Tools

The watchword is therefore Timeliness, and this cannot disregard a complete Economic Financial Systemic Approach, which consists of evaluating, in a correct predictive manner, the sustainability and profitability of a company's Business Model over time, taking into account the economic part (the correct amounts of investment, revenues and costs), the financial part (the economic variables over time with the related payment and collection days, the possible forms of financing) and the systemic part (the fiscal part, the macroeconomic part, stakeholder analysis and risk analysis).  

This is the correct approach to allow the entrepreneur/investor to keep his company on a healthy and correct track, knowing how to deal with any critical issues in advance and finding the best solutions. Obviously, to do this a proper information system is required that allows this.

What are the IT tools used in the Business Crisis?

The main computer systems used in the industry are:

Management Information Systems, the classic ERP, mainly have the function of working on the final balance and on accounts.

Some of these have activated the evaluation indexes of parameters for verifying the conditions of "Business Crisis", but unfortunately from an accounting and final balance point of view, producing a static picture of reality, but completely unsuitable for managing crisis resolution operations, because predictive and financial management start from completely opposite bases.

Therefore, traditional Information Systems are far from being able to support the entrepreneur in his predictive financial economic choices.

Excel Spreadsheet

In the management of "Business Crisis" problems, and substantially in in Corporate Valuation, the most commonly-adopted tool for Business Model analysis remains the spreadsheet, with all the conceptual limits that make it unreliable for such a complex and systemic analysis, like the evaluation of a Business Model, of a crisis situation. We will see in detail the reasons why. However, let us specify from the outset that the Excel spreadsheet is not even considered to be an information system, although many cases of pre-configured Excel templates are often seen on the market as software.

THE LIMITS OF EXCEL SPREADSHEET TECHNOLOGY

Unfortunately, the answer is no, as the average reliability of any Business Plan made with Excel spreadsheets technology, regardless of the skill of the analyst who made it, is on average 15-20%!

Let's see the reasons, discovering that, in addition to the lack of Reliability, there is also a lack of Opportunity and Profitability for investments managed with Business Plans made with Excel.

LACK OF RELIABILITY

The average reliability of an analysis of Debt Restructuring and Corporate Reorganization in the management of the problems of "Business Crisis", made with the technology of Excel spreadsheets, regardless of the competence of the analyst who elaborates it, is in the average order of 15-20%.

An approximation of about 20%, in the best case scenario, means that each result obtained has a reliability of 20% or, in other words, has a margin of error equal to its complement, i.e. 80%. This means, for example, that a Cash Flow value of €1,000,000, calculated in this way, ranges from a value of €1,000,000+/- 800,000, i.e. €200,000 to €1,800,000. 

This type of approximation highlights a problem of reliability of the result obtained, but even more of precariousness to take the entrepreneurial decisions that have a financial economic impact on the Business Model.

Let's look at the structural reasons for the inadequacy of a Financial Economic analysis carried out with Excel Sheet technology for the optimal resolution of a "Business Crisis" problem:

ANNUAL E/F ANALYSES:

are one of the most certain causes of the unreliability of the elaborated situation , for these reasons:

Cash that is always positive, on an annual basis, may, in fact, turn out to be negative for most months with the need to cover it with Bank Lines or a capital increase. The NPV values obtained are therefore unreliable. 

An annual cash flow prevents seeing the payment of taxes, dividends in specific months, concealing the evidence of critical liquidity issues, which become instead the prerequisite to have a reliable Predictive Model in Real Economy on which to make correct decisions.

Incorrect calculation of the circulator.

LACK OF A SYSTEMATIC APPROACH:

due to the inability of Excel spreadsheet technology to capture - at the risk of complexity and error incidence - all the variables inherent in a given Business Model, such as:

The VAT rates associated with each variable that enters the model.

Payment/collection days 

The different tax rates

Risk variables, not taken into due consideration.

PROBLEM OF VAT MANAGEMENT:

is in most restructuring operations incorrectly or insufficiently managed.

It is necessary to foresee the different management possibilities, such as: vertical compensation, horizontal compensation on taxes, DM10, etc., the possible options of reimbursement in compliance with the law.

In one Corporate Restructuring case, horizontal VAT compensation was not considered, which had a negative impact on the restructuring plan.

Inability to operate a line to finance any excess input VAT. 

CIRCULATING CAPITAL PROBLEM (DUE TO DIFFERENCES BETWEEN PAYMENT AND COLLECTION DAYS):

in most cases the Business Model is ignored not for competence problems, but due to the impossibility of managing it on an annual and not monthly basis.

In a Corporate Evaluation project, the amount of Working Capital was completely neglected.

PROBLEM OF THE ALGORITHMS USED NOT BEING CERTIFIED:

due to the lack of reference to sources declaring their correctness, which is an important element that every Investor/Entrepreneur should require. Certification is required for wine, for oil, but not for BPs, which decide on the analysis of investments or strategies worth millions of euros.

In a Debt Restructuring Project, the investor who was to acquire a stake in the group being restructured asked what algorithms were used and by whom they had been certified. Of course the Algorithms were not certified, because when are they ever certified! So the acquisition, which was supposed to be the result, was not completed.

COMPLEXITY-RELATED ERROR PROBLEM:

because they are directly proportional, so the more complete the BP model on the Excel spreadsheet, the greater the probability of error (of formula, of unconnected cell, of calculation, etc.), making the results unreliable.

Two well-known professors at MIT drew up the three-year plan of works to be done for a major government department. Unfortunately, a university student at MIT, after a few months, disavowed the BP/PEF for having found a trivial calculation error, but one that rendered the calculations unreliable, and also causing serious damage to the image of the government and the two distinguished professors. 

THEREFORE, THE "EXCEL SPREADSHEET", FOR THE MANAGEMENT OF "BUSINESS CRISIS" OPERATIONS IS THE FIRST RISK, EVALUATED TO BE ON AVERAGE ABOUT 80-85% 

LACK OF OPPORTUNITY

The possibility of managing the different cases that a "Business Crisis" operation can involve flexibly is unreliable and limited with Excel spreadsheet technology, as this technology does not allow models to be developed that can thoroughly simulate the different economic and financial aspects of reality.

In fact, to reproduce the different assumptions on Excel soreadsheets, means re-customizing the model each time, with consequent time-wasting, making operativity impossible.

However, not managing them means not being able to translate the entrepreneur's ideas into reliable financial economic data to find the best solution.

What does this limitation mean for the entrepreneur, for the consultant? It means making them lose business opportunities, opportunities for solutions that can range from a few thousand to millions.

Let's look at the structural reasons for the inadequacy of the Excel Spreadsheet due to the limited opportunities it can offer in the management of a "Business Crisis" operation:

DIFFICULTY/IMPOSSIBILITY IN BREAKING DOWN A BUSINESS MODEL INTO ITS BUSINESS UNITS 

due to the complexity that would be induced in the Excel model to handle them. In fact, the Business Unit represents the minimum unit of analysis with its investments, costs and operating revenues, used to break down the company model into its operating divisions, in order to allow the entrepreneur/consultant to decide the priorities of intervention, on which business unit to focus attention and operate.

In the debt restructuring of a corporate group, it is essential to have the possibility of consolidating the group’s debt situation and operate on the individual companies, to reduce debt, increase profitability and generate cash flows that can repay the debt, evaluating a capital increase, shareholder loans, bonds, write-offs with banks and possible opening of new bank lines.

Similarly useful is the management of Business Units in the breakdown of a company model, in its divisions, to understand which ones to maintain, which ones to implement, which ones to divest, etc.  

DIFFICULTY/IMPOSSIBILITY OF ANALYSING A BUSINESS MODEL IN ITS VARIOUS SCENARIOS 

based on the different assumptions, having to work on the formulas which is time consuming and increases the possibility of errors.

The ability to elaborate different scenarios becomes fundamental in order to focus the attention on the different assumptions, also depending on the interlocutor: banks, investors interested in participating in the rescue situation by acquiring shares, etc.

DIFFICULTY IN EXAMINING COMPLEX OPERATIONS

which, with Excel spreadsheet technology, would become so approximate as to be unreliable.

An operation of corporate reorganisation and debt restructuring, of a group consisting of 20 companies, prepared by an established consulting firm, but using spreadsheet technology after 2 months of testing was instead resolved in 3 weeks with "Finance Atena", to everyone’s satisfaction.

DELEGATION DIFFICULTIES

due to the fact that in the BP created using spreadsheets, the data are wired with formulas and therefore only the person who has drawn up the Economic Financial Plan can work on it with all imaginable limits and cannot delegate to other departments.

In acquisition processes, time is of the essence and therefore having delegated possibilities of loading data into the analysis model becomes important.

LACK OF PROFITABILITY

The analysis of a financial operation of Organizational Restructuring and Debt processed using a spreadsheet, as well as having a reliability of 15-20% and therefore not significant to seriously analyze a financial operation that can decree the life and death of a company has this recurring problem:

OVERESTIMATION OF SOURCES TO COVER INVESTMENTS (EQUITY, BANK LINES, SHAREHOLDER FINANCING)

due to Excel technology, because it does not allow financial optimization of cash flows, which is instead possible by breaking down the Company Model into Business Units, by managing flows on a monthly basis and by managing self-financing, which is too complex to reproduce using Excel technology. This makes it possible to evaluate a greater contribution of sources for financial sustainability, with the risk that the operation will abort before it even proceeds due to the impossibility of finding partners interested in the operation itself.

In a recent debt restructuring operation initially examined with a spreadsheet simulation, the need for an availability of 5 Mil euros turned out to be only 3 million Euros when re-examined with "Finance Atena".

SUSTAINABILITY IS ALWAYS CRITICAL

because it doesn't take into account all the financial variables involved. The reasons for these results are mainly due to the fact that a predictive financial economic analysis is a very complex analysis and it is inadequate to try to translate it on an Excel spreadsheet, due to its structural limitations and subjectivity.

Sustainability on an annual basis is critical in most cases as it does not take into account cash flows on a monthly basis, creating unrealistic expectations and, ignoring the necessary hedges, leading to an underestimation of the debt.

OVERESTIMATED DEBT SERVICE

due to the impossibility of a dynamic and optimised management of Debt Lines caused by the impossibility of managing all the parameterisation variables, such as different lines, draft priority, repayment method (constant instalment, constant capital, bullet, tailor made, etc.), payment frequency, projection on a monthly basis, interest rates, indexation, commitment fee, agency fee, etc

The Bankability of the operation becomes extremely uncertain due to the impossibility of accurately and reliably calculating cash flows.