In a nutshell

This article can help you understand how to take notice of the early warning signs of financial struggle (including making late payments, using your own funds and declining sales growth) and the steps you can take to counteract it.

Charles Brook, partner at Poppleton & Appleby

Charles Brook, partner at Poppleton & Appleby, Licensed Insolvency Practitioner and Business Recovery Specialist, shares his tips for looking out for signs that your company is struggling financially.

Statistically, most businesses fail in the first few years of operation.  Not all end in a formal procedure; many simply fail to thrive but a significant proportion get into financial trouble, often because the early signs are overlooked or not recognised.  More new businesses than ever before are being started by inexperienced owners who don’t appreciate that a high volume of sales, doesn’t necessarily mean that they are doing well financially.  It’s important to be aware of these early warning signs and take immediate measures to turn things around before it’s too late.

 1.      Regularly paying your bills late

Paying invoices late or being behind on loan or debt payments may just be the result of a temporary cash-flow issue but, if it lasts for more than a few months, then it’s a sign that trouble is being stored up and your business will be more vulnerable to failing if other problems arise before it’s sorted out.  Look over your budget and plan a new one with a cost-cutting scheme to make sure that can cover your expenses and get payments back on track.

It might be that your original budget was wrong and the best course is to revamp it to accommodate your true business needs.

2.      Struggling to make profit

When your profit margins are down, this may put a squeeze on your cash-flow and lead you to look for external sources of funding; this can open up a whole new area of risk.  Borrowing to sort out a shortage of cash may be a good short-term measure but, if the shortage is due to poor margins, the cost of borrowing will only make the problem worse.  It’s surprising how often new business owners miss the signs of weak profitability or rush to borrow in an attempt to improve the symptoms.

Ideally, you need to generate income faster than you spend it, which means getting paid by your customers as quickly as possible.  Good turnover on low margins isn’t a healthy situation unless you get paid immediately and if late payers or bad debts are forcing you to pay your own bills late it can soon spiral into a financial nose-dive.

A poor customer is little better than a bad customer but if you can encourage them into better habits you will be doing yourself and them a favour.

3.      Digging into your own pocket

During the start-up phase, it is very common for an entrepreneur to have to dig into their own funds to finance things but once the company is established you shouldn’t have to pay for anything out of your own pocket on a regular basis.  It can be a warning sign of a real crisis if this is happening.

It’s best to be smart about this and avoid the risk of going completely bankrupt, potentially losing both your business and your personal assets.  If you can see a rapid positive change coming up, using your own funds to ease cash flow can be a cost-effective temporary solution, but not a long-term solution.  You should consider other options or realise that you are heading for trouble and think about an exit strategy.

This isn’t an exclusive problem of young businesses, older enterprises that have been profitable and built up reserves can find these dwindling if the business starts to decline; in this situation the options may be more varied but the outcome is likely to be the same if the situation is left unchecked.

4.      Declining sales growth

Your rate of sales increase should be higher year on year than your rate of increase in overheads and cost of sales and if it isn’t, then it could indicate a financial problem.  Although it is natural for growing companies to see their rate of growth go down temporarily from time to time, if it goes down and remains in decline you should have cause to start worrying.

Accountants or financial advisors should be used for more than just bookkeeping.  They can give you advice about your revenue and profitability problems and help you come up with a better plan.  Remember that they will probably have experienced this with other clients and will be delighted if you turn to them for assistance.  You are their most important asset, without you and other clients like you they don’t have a business themselves.

5.      No capacity for salary increases

If a business can’t invest in its talent pool and deliver wage rewards it is a sure sign of financial stress.  Meeting market wage expectations helps to maintain employee morale and minimise staff turnover.  Recruitment costs, training downtime, sickness and potential client service issues can be more financially damaging to a business than paying acceptably.

Employees that feel cared for will be more understanding and supportive of you if times get difficult in the future, perhaps more prepared to accept a reduction in hours or to contribute extra effort when the need arises.

It can be important to trim costs from time to time but some costs are crucial to keeping your business alive and letting go of these, as well as potentially important people, is likely to hit the quality of your product or service.   If cost-cutting becomes critical and the advantages are small it is time to take advice or consult a Licensed Insolvency Practitioner to check your options.

With offices in both Central Manchester and Huddersfield, Poppleton and Appleby can handle any insolvency situation and produce the best outcome for all of their clients.

Contributed by Charles Brook
Kate Shaw
Article by Kate Shaw
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