Building 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
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
Rob Hunt, PricewaterhouseCoopers business recovery partner, says that to
monitor cash properly, companies must have accurate cashflow forecasts available
‘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,’
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
‘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
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
‘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
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.
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