Many of us laugh out loud at the social media clip of someone with eyes on their phone screen who walks straight into the fountain. There is an inevitability that those looking at something right in front of them (often completely unimportant) miss the big thing a few paces ahead (which might be catastrophic).
Of course, it isn’t funny when it happens to a business.
A few businesses have recently approached us for help, having spent months, sometimes years, focused on the seemingly important things right in front of them, and missed the critical issue that now puts their business at risk.
When we take a look at their numbers, the trends were clearly there, but key people were firefighting day by day and did not take the important steps to protect the business or indeed themselves.
So what are the key issues and what should you be looking for?
The number one issue in any business is cash. How has your cash position changed in the last 12 to 24 months? Are you bouncing around your overdraft limit every day where it used to happen once a month? Have you borrowed expensive short-term debt to get through a sticky patch, intending to repay it but not been able to? Did you take out a CBILS or Bounce Back Loan and have just seen this extra cash evaporate? Have you put your own money in or reduced what you take out?
These things seem okay at the time, as owners are convinced the issue is a glitch, but they then find that nothing has changed months later. One problem in these situations is that the short-term fixes are often more of the owner’s money at risk, or borrowings that come with personal guarantees. If the business does fail, the consequence for the owners can be dramatically worse.
Poor cash flow is the inevitable result of poor trading. Downward trends of turnover, margins and net profit can all be easily tracked. When reported as numbers on a spreadsheet, trends can be hard to spot, but do a pretty graph and the downward slope is a very visible slide into financial trouble. Does your business track its KPIs (Key Performance Indicators) and present them in a way that makes it impossible to ignore the story it tells?
What do you do if the signs of financial stress are clearly there?
The most important point is to act early. If you jump into panic mode and seek advice on what to do, and then take some key protection steps, but if it actually turns out it wasn’t that bad, all you have done is waste a little time and money. If you continue in ‘fingers crossed’ mode or just tinker with a few things then it might be too far gone to recover when you do own up to the problems and seek professional input.
We have run a number of ‘recovery’ projects for businesses who are in difficulties, with good success. Not all have survived, but those that failed did so in a far more controlled way with less consequence for the owners. Sometimes that is just by making the tough decisions owners don’t want to make, like making 10 people redundant to protect 40 jobs that could be saved. Often it is a more focused approach to pricing, marketing and selling processes, or a sharp knife to business costs. Whatever the actions, a business half the size that survives is better than a larger one that fails. Whilst no one starts a business expecting it to fail, the statistics suggest that is an all too likely outcome. You have probably heard the adage “80% of business fail in three years”. Interestingly, research at Companies House statistics on company failures (not sole traders and partnerships) which actually showed that the risk of failing was about 12% in any year, but this hardly changed from year 1 to year 15. I.e. bigger and more established did not suggest safer and better run.
So look at your arrangements and understand what would happen if you failed. Who would lose money, who would chase you personally for debts of the business? Who has the power to seize assets, and who has no choice but to wait in the queue and see what is left?
There are some steps you can take to protect your own financial position, such as transferring equity in your home to a spouse, or replacing money borrowed with personal guarantees for amounts without them. The problem is that steps taken imminently before a business fails can be completely ignored by the insolvency practitioner appointed to sort out what is left. Therefore, the right time to take any action is when you don’t think there is a problem.
Understand the significance of being a sole trader or ‘normal’ partnership, where all of your personal wealth is at risk if the business fails, and being a Limited Liability Partnership (LLP) or a Limited Company, where personal wealth is protected. If you are still trading outside of LLP or company protection, please think again.
If you have that nagging doubt that your business is at the top of a slippery slope, and want to do something before it slides too far, or perhaps you feel everything is fine but some precautionary steps would be a smart thing to do, why not have one of our financial health checks.
This simple review of your business examines all the key stress points and looks at whether you are in good shape, or whether some remedial action is needed, and gives advice on how you may want to restructure your affairs to reduce your risk if the wind changes. So if you want to do a health check on your business, give us a call.