1st May, 2020

Virgin Australia goes into administration — 3 lessons for SMEs

Virgin Australia’s recent collapse can teach SMEs the importance of cash flow, being self-sufficient, and how to face harsh realities with dignity.

Amid ongoing financial strife, Australian commercial airline Virgin Australia announced last month that it had placed itself into voluntary administration, with the hope that the airline would eventually be reborn under new structures of ownership and fresh strategies.

Whenever a story like this breaks, digging beneath the surface and looking at the forces that drove the event to take place is often a great learning experience for entrepreneurs. Taking this approach can help other business owners learn how to avoid practices that may bring their operations to its knees.

With Virgin’s unfortunate circumstances, there are three lessons for SMEs to consider, which in turn can help them avoid the same slippery slope, and reinforce their businesses in preparation for similar circumstances.

READ: 3 lessons in leadership from Qantas’s reaction to COVID-19

1. Avoid spreading yourself too thin

Virgin had been grappling with financial struggles for quite some time before placing itself into the hands of administrators.

The airline was reported to have more than 12,000 creditors, to which it owed close to $7 billion collectively.

Times were so tough for the airline, that it had recently brokered a deal to sell its Velocity frequent flyer program to a third party, with the hope that the cash injection the deal would bring would significantly improve the state of its unhealthy balance sheet.

Covid-19 may have been devastating blow to Virgin, but in truth, it was merely the last straw that broke the airline’s back.

Avoiding the same fate as Virgin means taking a more risk-averse approach and cautiously managing cash flow.

Small business owners need to develop a healthy business plan that keeps them protected – even in the face of the most unexpected and major blows possible.

2. Build your business to be self-sufficient

Receiving investment has always been a fundamental part of running a startup.

It can take time for a good business idea to generate enough revenue to cover its own costs, so pitching the idea to private equity investors or applying for competitive government grants in order to receive capital funds often features in a startup’s business plan.

Before it went into voluntary administration, Virgin Australia had been doing some capital raising of its own. The airline had approached both the public and private sector for a cash injection that would bail them out of their dire predicament.

Ultimately, the amount of capital being offered wasn’t substantial enough to save the airline, and it opted to place itself into the hands of administrators instead.

Relying on an investor’s capital may have been a common trend amongst startup founders in the past, but Virgin’s demise highlights the flaws that exist in such a business model.

Striving to be completely self-sufficient is another sure-fire way to remain protected in all circumstances.

3. Know when to call it a day

Passion is a key part of running a business. Small business owners who care about their offering are able to celebrate the good times and persevere when the going gets tough.

But, it’s also important to remain realistic and recognise when it’s time to move on. One of the harsh realities of business is understanding that there may come a time when you need to close up shop and focus your efforts on the next venture.

In the famous words of Kenny Rogers, “you’ve got to know when to hold ’em, know when to fold ’em”.

Theoretically speaking, Virgin Australia could have pushed its campaign to stay alive for longer. The business’s leaders could have accepted a bailout, changed direction and continued fighting until they ran into the next obstacle.

Instead, they recognised that the time had come to move on and placed the business into voluntary administration.

For those SMEs that have reached this point in their journey, take a page out of Virgin’s book and don’t be afraid to face those harsh realities.

Bowing out when appropriate to do so isn’t a sign of weakness – it shows courage and dignity, and is a great way to end one chapter and begin the next.