Preparing your business for the year ahead
There is no question that UK businesses have faced unprecedented challenges in the past two years. As we head towards the end of the year, we have reflected on what puts a company at risk of insolvency, and what can be done to protect viable businesses and their owners.
It is always advisable to have a comprehensive business plan which can be amended, as and when it may be necessary. If you do not have an existing business plan, take time to draft one and seek assistance if required. Dividing the plan into smaller steps can make the process less daunting to tackle.
In addition to having a sound business plan there are many simple steps that business owners can follow in order to strengthen their business, such as:
Reviewing Budgets and Projections
Prepare budgets and financial projections which are realistic. These should include what you reasonably expect to make in terms of sales and allocate budgets against your operating costs (such as your direct costs, insurance, marketing, payroll, premises and professional costs). Periodically review these forecasts and if actual figures are far from your original projections, consider why, and act upon this information.
Dealing with Overdue Invoices
Unpaid invoices will have a negative effect on any business. If payment is overdue from a new customer think about whether you want to trade with them on another occasion? If a long-standing customer is struggling, it might be appropriate to take a more lenient approach, but be clear on what your position.
There are many ways to get business funding, ranging from start-up loans, traditional bank loans, factoring, or peer-to-peer lending. In addition, The Recovery Loan Scheme is currently open to businesses of any size to support them to access loans and other kinds of finance so they can recover after the pandemic and transition period. You can find more information on this scheme, here. Always be mindful that these options may require commitment from you in the form of a personal guarantee.
Increasing Efficiency and Productivity
Have processes in place that enable you to get the most from your existing resources (i.e. your staff). Communicate your productivity targets, how these are measured, and set clear goals. Regularly review whether there could be more efficient ways in which to operate your business, perhaps by automating or outsource tasks.
What are the warning signs of financial distress?
When a company falls into administration or liquidation it is common for the business owners to think about whether key warning signs were missed, and if action could have been taken sooner.
In many cases, the answer is yes. There are many early warning signs that might indicate that your company is experiencing financial stress. Being aware of these signs and knowing what action to take could help you to prevent losses, or your company becoming formally insolvent.
When business payments and expenses exceed its income (sales), the company is cash flow negative. This may be a temporary problem, but if cash flow stays negative over a sustained period it is a clear indicator the business is in trouble.
If your company is facing pressure from its creditors (whether the bank, finance providers or its suppliers) this is usually a sign that action is needed. You may have noticed that your company has reached the limit of existing facilities, has accrued arrears on long-term agreements, or is exceeding payment terms with its suppliers.
Debt to Equity Ratio
This ratio measures how much debt a business has compared to its equity and is a measure in assessing debt default risk. The higher the liabilities, the greater the risk to investors and it may also make it more difficult to obtain further investment if needed.
A breakdown in the senior management team, or the departure of key personnel can also be red flag. A business needs its employees to function and if your company has suddenly lost valued members of staff, or cannot make competitive offers to replace them, this could lead to wider issues.
Of course, this list is not exhaustive, but the presence of one or more of these issues is a strong indicator that your company is struggling.
What should I do if my business is struggling?
The most important thing to do is seek advice before the position deteriorates. By speaking to a Licenced Insolvency Practitioner you can work together to establish whether the problem is temporary, or whether more formal action is required.
Contact us as Insolvency Practitioners in Birmingham
An Insolvency Practitioner is best placed to provide advice on all of the options available, even if an informal solution would be best. At Keywood Group we pride ourselves on providing you with clear advice from the outset. Please feel free to contact us for a no obligation consultation either at our offices in Birmingham or at your offices anywhere nationwide about the options available.