How to tell if your business is in trouble and what you can do about it

Insolvent concept imageBusinesses don’t often fail without warning. Learn how to identify common causes that can sink a business, spot warning signs, create counter measures and be clear about insolvency.

As with everything in life, businesses go through ebbs and flows. Sometimes there are periods of success but there are also periods of stagnation. The former and the latter, however, aren’t in the laps of any divine beings. A series of important decisions made by you, as well as the level of aptitude for problem-solving from key staff, can make a business sink or swim.

Even when you do latch onto success, the world can start changing. For instance, things look very different for many businesses now when compared to a decade or two ago. Today, traditional high-street retailers are struggling to stay afloat as the digital boom provides a new online battleground for sales supremacy. Technological solutions have also revolutionised the way we approach day-to-day activities in our businesses, like we perform electronic transactions, use cloud computing to back-up files, take meeting notes with an app, among many other tasks.

In more ways than one, business owners are keenly aware that approaches that once worked have become outdated. Also, what is effective today may quickly be replaced. So whether it is through changing landscapes, strict adherence to old methods, a series of bad judgment or simply inexperience, established small to medium-sized businesses can struggle to adapt and thrive, putting the company at risk.

New businesses can also face distress. Numerous studies have noted that about 20% of new businesses fail within a year; and a whopping 60% shut down within three years. This means that learning how to spot when your business is approaching insolvency is a test of your ability as a company director to adapt and steer the company through choppy waters. The majority of these ominous indications cut across all industries and, as such, can be found in businesses up and down the country and around the world. In this article, our London-based insolvency practitioners aim to help you identify these troubling causes and signs. Also, we aim to share what you can do to effectively manage them.

Eight common causes of failed businesses

Comparable to a person’s health, when a part of our body fails or when we face an illness, there are usually a number of signs and symptoms that tell us something is happening. We can choose to either ignore these problems until the symptoms get worse and unmanageable, or we can choose to get treated once they appear. The same goes for businesses – as a business owner, it is vital that you can correctly identify the problems and work on immediate solutions.

But in order to know if the signs and symptoms are serious enough to cause business failure, you must first know the causes and this can be challenging as the reasons are vast and varied. Having said that, there are eight common causes that are often blamed in the failure of businesses.

1. Poor management of cash flow

Poor cash flow management is always a bad sign for any business and is usually the prime culprit in business failure. It can even happen when your business is raking in the profits. This can be caused by a number of factors. If your business is profitable, yet is hampered by poor cash flow, this can suggest that there could be high expenditures, too much outstanding receivable, or that something insidious may be going on behind-the-scenes (such as inaccurate or even fraudulent transactions).

In the UK, late payments from clients are a serious issue and quite often, you may even pay have to VAT or tax to HMRC on income that you stand no chance of receiving first, which can further deepen your cash flow woe.

Over-expanding the business rapidly can also cause cash flow problems – a difficult challenge for even the most experienced of business owners. Additionally, inaccurate or hastily thrown together cash flow statements can also lead to critical failure. Work with reputable accountants who can review your numbers and produce accurate cash flow forecasts that allow you to make informed decisions.

In short, unless you run a business that experiences known seasonal fluctuations, consistently poor cash flow is the key indicator of a business that is on its way to collapse.

2. Inadequate financing

To kick-start an idea, to expand, or even to address a temporary cash flow gap, you need money. If you do not have enough cash in the bank, chances are you need to borrow. In our article What is the right source of funding for you, we discuss nine common types of funding for small business owners and they are:

  • Self-funding or love money
  • Start-up loans
  • Bank loans
  • Secured finance from a specialist lender
  • Angel investors
  • Venture capital
  • Crowdfunding
  • Peer-to-peer lending
  • Grants

Apart from your family members and friends, it is safe to say that no company would loan you money voluntarily. Small business owners must be prepared to compile financial data into easy-to-understand charts and be ready to answer many tough questions from potential creditors.

3. Ignoring customer needs

It is fair to say that almost all customers want good products or services at a fair price. They also prefer the buying process to be relatively easy (without hassle), and they want to feel valued throughout. If they believe that they cannot get any of these from you, they are likely to go elsewhere.

It takes a great amount of data to understand customer needs – why they shop and how they shop. Listen to what your customers are saying (and also what they are not saying) will allow you to create effective marketing messages that can convince your customers that they need your products or services.

The trick, of course, is to make sure that you are always one step ahead, meaning you shouldn’t start listening to customers only when your sales are down – because by this point it could be too late to save your business.

4. Loss of key clients

Following on from cause above, the inability to retain your key and loyal clients is a sure-fire sign that your business is heading for the knacker’s yard unless it changes. There are a number of reasons as to why this often happens. It could be that your customers are getting better offers from competitors; your customer service may not be good; you may be offering outdated products and/or services; and, most importantly, you may not be meeting their expectations.

A sensible counter measure is to review your customer service efforts, your prices, what you’re offering in comparison to competitors and your product or service line-up.

It is worth bearing in mind that losing clients are unavoidable sometimes – your clients may move away, retire, or their business models may have changed. To soften the blow of losing clients, you must have new prospects whom you can convert into paying clients. Cultivating prospects usually takes time and effort so make it a regular exercise, otherwise losing clients will surely result in a significant decline in sales and revenue.

5. Lack of management control

In order for a company to be operating as intended, managers have to exert a level of influence over staff to ensure that strategies that benefit the business are routinely adopted and correctly applied. Known as ‘management control’, it is the process that allows managers to determine if a business is performing in-line with its expected standards and whether resource usage is effective or not. A lack of management control occurs when managers are no longer influencing their staff to implement strategies, and when the management loses sight of these standards.

This lack of control can lead to bad decisions (or even no decisions) spiral out of control, putting the company in trouble.

6. Bad employees

Following on from the previous cause, poor recruitment practice that hires bad employees can also sink a business. The words bad employees refer to staff who come to work late, have a poor attitude, rude to customers or even steal from the company. Very quickly, rude employees can reduce the levels of productivity of your good employees, your stock, or even your cash. In the UK, it is said that 40% of fraud is caused by staff, which amounts to some £76 million a year – now that is a staggering sum, isn’t it?

The management or you (the company director) must regularly review staff performance and get tough on bad employees before it is too late.

7. Growing too fast

Every business exists to make money and grow, either organically or inorganically. Organic growth means using your internal resources and processes to achieve better output – this process is sustainable but slow. Inorganic growth, on the other hand, means you achieve instant market share and revenue boost by acquiring or merging with another company.

When you grow too fast, mistakes can happen. Even in organic growth, the moment you have mistaken temporary demand for long-term prosperity, or you lack a robust process to handle additional client requests, you are likely to make decisions that are clouded by errors, leading the business down a path where it can no longer make enough profit to cover its expenses.

8. Legal action

The cost of legal action – whether you are taking action against another company or you are being sued – is significant. If your business loses its case, the company may have to pay fees that can easily wipe out all the profits made previously. It is not just about losing money too. You also lose time and energy that could be better spent on improving your business. In short, legal action can be devastating for small businesses.

To avoid prolonged legal cases, consider out-of-court settlements, although prevention is a better approach. To avoid being sued, for instance, small business owners may consider:

  • Getting a solicitor to review all contracts prior to signing
  • Keeping accurate records and making sure that all sensitive data are safe
  • Implementing policies and procedures within your business
  • Being honest in business dealings
  • Being compliant with the law
  • Providing quality products if you are a supplier, as high quality usually lowers defects and lessen administrative and legal issues, as mentioned in the article 5 ways to manage rising business costs
  • Having the right type of insurance to protect your company

Six signs that your business is in distress and at risk of failing

Now that we’ve established some of the main causes of business failure, it’s time to look at some of the symptoms and signs that can be identified before any of those causes come to pass.

1. Sales are down

If sales have significantly declined over a period of time – like sales dipped 20% in the last three months, which were already down 30% from the previous three months – you must realise that unless counter measures are put in place and they can turn things around quickly, your company will fail.

There are many reasons why sales are down and some of them are beyond your control, such as changing consumer taste or a virus pandemic. Irrespective of the reasons, if you don’t have enough cash on hand to tide the company over, then the business is at risk.

2. Little to no capital

Many reasons can contribute to a shortage of cash. Decreased sales, high receivable and big overhead are among the many reasons. Whatever the case, a lack of capital means that you cannot meet ongoing obligations.

3. Creditors are asking for immediate money

The moment demand letters from HMRC, landlord, utility companies and suppliers start to pill up, chances are, they are likely to take action against your company soon. This is a difficult position to be in, so please talk to a qualified insolvency practitioner like our team at Berley as early as possible. Our aim is to conduct a solvency review of your company and discuss all the options available with you.

4. Selling or refinancing assets to raise cash

Assets are an important resource – your need the machine to process order and the van for delivery, for instance. Consider refinancing first, and if you have to sell them to raise short-term funds, you are clutching at straws.

5. Lenders won’t touch your business

If you’re finding that you can’t get any loans to help finance your business, it’s time to examine your strategies because something in your business is causing them to stay away.

6. Unpaid wages

Many small business owners tend to draw a low salary and use dividends to make up the income, but staff wages must be paid every month. If you struggle to pay wages, then you must let your staff know immediately and work out a solution.

What can you do to save your failing business?

As mentioned in the article, there are similarities between a failing business and a failing body. When we aren’t well, we don’t try and treat the problem ourselves; we go to see medical professionals who will identify, treat, and cure our health problems.

It’s the same when it comes to business. No matter what your experience level is when it comes to running a business (or businesses), not everyone is King Midas who could turn everything he touched into gold. Mistakes are common, changes in consumer behaviour is a given, other factors like changes in government policies, new threats from competitors, weak economic conditions are also beyond our control.

The moment you realise that your business is in distress, actions you can take to reverse the situations include:

  • Identify the issues – do this quickly so you have time to create counter measures.
  • Cut costs – it is easy to remove non-essential items, but reducing fixed overhead costs can be a challenge.
  • Generate new revenue – increase sales by expanding your client base, creating additional services, reducing prices, working with complementary businesses, among other ideas.
  • Negotiate with your creditors – be honest with your landlord, suppliers and other creditors about your situations as you seek to lower the bills or lengthen the credit period. If you owe HMRC, ask for Time To Pay (TTP) and provide justification.
  • Restructure your company – make your company lean and agile by improving every operational process.
  • Talk to a qualified insolvency practitioner – ask them about your options.

At Berley, our qualified insolvency practitioners will listen to you and access your situations, before discussing options that would work in your case. Our discussions will be honest and may include:

  • How can the company be rescued realistically?
  • Can you sell the company?
  • Can a Company Voluntary Agreement (CVA) apply? A CVA is an agreement between the company and its creditors that often leads to reduced and/or rescheduled arrangement of debt repayment.
  • If all options are exhausted, what liquidation would mean to you and your company?

Can your company avoid insolvency?

Unless a creditor has appointed an administrative receiver to take control of the company’s asset to recover their money, you can still avoid insolvency by talking to an insolvency practitioner and let us work alongside you to address the situations.

Even if insolvency is unavoidable, we can still explore a Company Voluntary Arrangement (CVA) or a pre-pack administration. A CVA, as explained in one of the above paragraphs, often involves paying your creditors a reduced sum over a period of three to five years. A pre-pack administration allows you to sell assets before the appointment of an administrator.

If liquidation is the only option, we would explain what it entails so you could move to this stage efficiently, ending the stress of creditor harassment and working to protect yourself from possible personal liability.

Contact Berley for trusted insolvency advice

The hardest challenge, admitted by many entrepreneurs we have worked with, is to acknowledge that there is a problem early on and seek help accordingly. The sooner one seeks help, the better the chance of avoiding insolvency. Sadly, we have seen too many times that small business owners chose to remain optimistic and hope that the problems would go away – they rarely do.

At Berley, our insolvency practitioners work with small business owners across London. Highly discreet and ethical, we do not judge your circumstances or focus on past mistakes. We also respect your confidentiality. Our goal is to conduct a solvency review of your company and discuss your options. The focus here is about your company’s future, particularly how you can be in a position to continue or start afresh.

Call today on 020 7636 9094 or email for a free initial consultancy. Alternatively, you can get in touch via our online enquiry form and we will be back in touch with you as soon as we can.

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This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.