RSS feedsBuilding a successful business is a difficult task, and it's a fact that even the most capable people can fail in their attempts to create a successful company.
But is there anything that an entrepreneur, or the owner of an already established company that is going through a rough period, can do to prevent a business from hitting the buffers? How can a business even know whether it may be at risk in the future?
There are number of key indicators that small and medium-sized enterprise can monitor to gauge the health of a business, and a remedy for each time that one of these indicators warns that danger lies ahead.
Go with the flow
The first indicator that a business should monitor is cashflow. Cash is the heartbeat that keeps a business alive and is the first place to look for gauging a business's prospects.
'From our experience, most businesses can improve their cash management processes and generate more cash from their operations,' says KPMG restructuring partner Jane Moriarty. 'Every business decision that a company makes has a cash implication.'
Rob Hunt, PricewaterhouseCoopers business recovery partner, says that to monitor cash properly, companies must have accurate cashflow forecasts available to them.
'Forward-looking cashflow forecasts provide visibility. They allow a business to see what is around the corner. If a cashflow target is missed, then how is the business going to adapt to that situation? Such forecasts are essential,' Hunt says.
Plan your work. Work your plan
Cashflow forecasts are just a part of the detailed planning process companies should be doing regularly
Kim Stubbs, operational restructuring partner at BDO Stoy Hayward, says businesses are taking massive risks if they do not have plans in place to react to situations that may emerge in future.
Stubbs says different industries should all be able to work out what the risks facing their business are and prepare accordingly.
The areas to focus on are what a company's cash headroom is during the worst periods of the business cycle, what the exposure is to high-fixed costs, expensive wage locations and inflexible union arrangements and finally, what the 'dig deep' savings potential is, if needed.
'Businesses with substantial high-fixed costs and high labour rates where capacity utilisation and volumes are critical to costs recoveries need to be aware that they can become loss making as soon as volumes drop off. Businesses heavily reliant on future revenue streams arriving through intangible actions Ð such as the development of new technology Ð need to be aware of cost overruns and revenue delays,' Stubbs says.
Hunt says monitoring costs and future costs through thorough planning is the best way for a company to protect itself from tough times. He believes that the immediate reaction to a potential crisis is to attack the cost base and only then investigate ways to improve sales and revenues.
'The first reaction from most businesses in trouble is to increase sales in order to increase cashflow. The best reaction, though, is to cut costs. A business is in complete control of how it manages costs, so it knows exactly how any decisions will help cashflow. Sales are dependent on so many outside factors that are beyond a business's control,' Hunt says.
Creditors and debtors
The speed with which a business can pay its suppliers and collect money owed to it provides an excellent picture of its chances of survival.
Delays in paying invoices or collecting money from debtors, quibbling over invoices to buy more time, or only paying invoices when another supply of goods is required are all tell-tale signs of trouble.
A weakness in any of these areas immediately says that a company is experiencing working capital problems.
Mike Rollings, business recovery partner at Baker Tilly, says that, above all, businesses experiencing these problems should keep things simple and act decisively.
'This is really not rocket science. If debtors are not paying, they need to be chased up. If invoices are not paid on time then a business needs to know exactly why and act accordingly,' Rollings says.
Ask for help
When companies spot any of these signs it is crucial to keep one thing in mind: don't adopt a head-in-the-sand-approach and never be afraid to ask for help.
According to Hunt, it is a natural reaction for most people, particularly entrepreneurs with strong characters, to see asking for help from other experts as a sign of weakness.
'Many business people are self-reliant and resourceful and will always try and fix problems themselves. The thing that they sometimes fail to recognise is that, as business grows and changes, new skill sets are required and that outside expertise is required to provide these skills,' Hunt says.
Stubbs says businesses can gain massive amounts by calling in their accountants, lawyers or a non-executive when trouble emerges.
'Outside experts can tell a business if it is sophisticated enough in the information it draws from around the business upon which to perform analysis and form decisions.
'Advisers can also find out what other businesses are doing to combat and fight off financial challenges and what the best practice is out there.'
By appointing a trusted non-executive, or building a close relationship with an accountant or lawyer, business can take a big step towards protecting themselves from financial difficulty.
Have a business plan.
1 You need to know how your business will cope in tough times.
2 Constantly monitor costs, overheads and sales. Without this information you have no idea how your business is performing.
3 Prepare cashflow forecasts. You need to have a view of what your cash situation will be in the future.
4 Measure performance against these forecasts. A missed target is a sure sign that trouble could be on the way.
5 Prepare debtor and creditor lists. Know who you owe money to and, more importantly, who owes you money.
Business alert checklist
How do you know when your business is on the brink of running into to trouble and what steps can you take to prevent problems from arising? This checklist from UHY Hacker Young lists key warning signs and preventative measures that all businesses should have in their finance tool kit:
- Poor debtor collections. If those who owe you money do not pay up, you will soon be in trouble.
- Cash is reducing and bank overdraft is increasing. Cash is king and nothing can be worse to your cash balance than a spiraling overdraft.
- Rising stock levels combined with static or weakening sales. Inventory that isn't moving locks up resource that can be used elsewhere, which is especially bad when sales are down.
- Late payment of suppliers' invoices.
- Clearing debts by lump-sum payments on account.
- Delaying payments to suppliers by disputing invoices.
- Excessive use of post-dated cheques.
- VAT and PAYE arrears.
- Search for new suppliers who will make more credit available.
- Receiving a statutory demand for payment.
