AlixPartners: Four warning signs of financial distress leaders should act on
Following a period of economic slowdown, inflation, geopolitical uncertainty and other business challenges, organisations across Australia are under increasing strain. Against this backdrop, experts from AlixPartners have identified four warning signs of distress that must be recognized before they escalate into critical financial strain and insolvency.
According to AlixPartners, a global management consulting firm with an extensive track record in restructuring, recognising warning signs at an early stage is essential to staying ahead of emerging issues and preventing potential business collapse.
By responding to these warnings in a timely manner, stakeholders – including leaders, financiers and shareholders – can take corrective action, preserve value, restore stability and ultimately put companies back on a path to growth.
Warning sign #1: Decreasing access to quality capital
In Australia, private credit financing has gained share as high-quality financing options recede. As bank lending conditions remain tight, companies are looking further down the risk spectrum by seeking funding from lower-quality sources at higher interest rates. The shift away from bank financing is likely to heighten risks in the years to come.
Peter Saville, Partner & Managing Director and Australia Country Leader at AlixPartners, said: “In Australia, we’re seeing businesses shift away from the big four banks towards private credit. This costs more, but it can shoulder greater risk. The difficulty is that, in many cases, this defers problems rather than resolving them: the debt, and the restructuring that can follow, are simply pushed down the road.”
“For a good many companies, an uncomfortable restructuring is deferred, not avoided,” Saville continued.
Warning sign #2: Mismatch between EBITDA and cash
Earnings before interest, taxation, depreciation, and amortisation (EBITDA) is a widely used measure of company profitability, but it does not always translate into sufficient cash flow to service debt.
With EBITDA excluding the costs of financing, taxes, and asset aging, company stakeholders should carefully review each business’s debt-servicing capabilities. Liquidity management is an increasing concern for companies in Australia, particularly in capital-intensive sectors such as construction.
“The troubles in the Australian construction sector over recent years are a textbook example of the mismatch between EBITDA and cash,” said Saville. “Contractors report positive EBITDA, but on fixed-price contracts, the cash needed to keep the business running can drain away long before the EBITDA figures catch up. This has been all the more true as post-Covid-19 cost inflation pushes expenses higher.”
Warning sign #3: Missed milestones and targets
As past high-profile corporate failures demonstrate, missed targets, milestones, and shareholder commitments are a key warning sign for company stakeholders to monitor. While operational setbacks can be concerning, the most significant warning signals according to AlixPartners typically arise when companies fail to meet commitments to shareholders, lenders, or investors.
Patrick Bance, Partner & Managing Director at the consulting firm, commented: “Delayed statutory filings and delayed or downsized fundraising efforts can be an early warning sign of potential disagreements about asset valuation, business performance, forecast cashflows, and investor confidence in the company.”
Warning sign #4: Senior management churn
A stable management team with a clear, cohesive strategy is a positive sign for any business, whereas senior management turnover is often an early sign of company distress. “The process of replacing departing leaders is highly disruptive to the normal functioning of business and can set a company’s progress back,” said Saville.
“A degree of senior management churn is, in truth, healthy; the departure of a CFO, however, is worthy of more attention. When a CFO is replaced by a more junior internal appointment or is found to have left over a disagreement on financial strategy, that is precisely the moment the market should be posing hard questions to the board.”
Take control early before options narrow
Saville and Bance emphasize that when signs of distress emerge, time becomes a critical asset. “Stakeholders who act early have access to a broader set of value-preserving interventions, while those who delay often find themselves relying on increasingly disruptive measures,” said Saville.
Bance added: “Early intervention is the single most effective tool for preserving value, protecting stakeholders, and restoring businesses to sustainable growth. Organisations that emerge strongest are typically those that recognise the signals early, confront difficult realities quickly, and act decisively before circumstances force their hand.”
