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The alarm bells that warn your business is at risk

These are the six clues that could indicate your business is at risk. Linda Whitney reports The alarm bells that warn your business is at risk

How safe is your business? Business insolvencies reached 4,462 in the first quarter of 2018, the highest level since Q1 2014.

But insolvency is often the end of a long road that started with some early indicators that things were starting to go wrong.

What are the red flags a small business owner should always be watching out for? And once spotted, what should you do about them?

“The main signs of business distress do not change over time - they are always going to be much the same and always merit action,” says Brian Johnson, licensed insolvency practitioner at HW Fisher & Co, who has helped many small and medium-sized enterprises in distress.

The key to spotting them is keeping a close eye on the internal workings of your business - though at present there is also an increased need to look at the wider business environment.

Things to look out for include the following:

Difficulties covering regular paye, tax or VAT bills

“This is one of the earliest warning signs and can quickly snowball into an unmanageable level of debt,” Brian says.

Speak to HM Revenue & Customs fast to find out if it can off er you any arrangements to pay.

Regular cash flow problems

There may be plenty of revenue in the pipeline, but many businesses fail because they lack the working capital to keep going until it arrives.

Brian advises: “Make sure you have enough working capital to avoid cash flow crises. Maximise it by avoiding collecting client debts too late or paying creditors too early.”

Being busy, but generating no more money

Busy with no discernible improvement in the financial position of the business? You’re treading water

Brian says: “You must find out what is going wrong before you can tackle this. For instance, are you spending more time firefighting than actually running your business?”

He advises that you spend time looking at the business as a whole to track down the core problem. Only then can you rectify it.

He warns: “Don’t take a head in the sand approach, as it will not solve your problem.”

Create a clear strategy and put goals in place, so you know where you’re going and can monitor progress.

Customer dissatisfaction

High levels of complaints and returns from customers may mean you’re spending too much time chasing new business and neglecting existing customers.

Brian advises: “New business is important, but existing customers and clients are arguably even more so. Make sure you look after existing clients, as well as working on acquiring new ones.”

Failing to invest in your business

This is tempting if finances are tight, but Brian says: “Thrift can sometimes be fatal.

“Over time, failure to invest in new equipment, for instance, can lead to higher maintenance bills for your old stuff and result in reduced efficiency and loss of market share.”

Repeatedly seeking extra funding

If you’re repeatedly asking for a higher overdraft limit or larger loan, or considering remortgaging or borrowing from friends, step back and think about why.

Brian says: “Throwing more money at your business is rarely the solution. It’s more likely that you need to change something fundamental, so think about what it is.”

Just because you spot one or more red flags doesn’t mean your business is automatically doomed.

However, Brian says: “Red flags do mean you should take urgent action, because the sooner you tackle the problems, the more chance you will emerge unscathed.”

Consider the wider environment

Most of the signs of business distress can be identified by looking into your business - but at present it pays to raise your head and look at the wider business environment too.

The business go-slow that followed the Brexit vote is likely to recur if Brexit goes ahead. Brexit will also exacerbate the shortages of overseas workers already afflicting many sectors and recruiting people in the UK is likely to raise business costs.

Brian says: “If we crash out of Europe, it will have a big effect on exchange rates, so SMEs importing stock from abroad will be hit. In the long term, importing will require more admin skills, which many SMEs do not have.”

My business brush with death

The Brexit vote was a factor in the near-death of mobile app agency The Distance, but founder Anthony Main managed to bring it back from the brink. He recently took on its 20th member of staff two years after it almost closed down.

Anthony says: “In 2015 business leads started to fall as competitors ate into our market. We had been complacent - at first we had owned a large part of the market, but other entrants had reduced our share. We had failed to monitor the competition.”

He also admits: “I had not been looking ahead to see what would happen when our present projects were over.”

Then after the Brexit vote, business leads were not converting into sales. “The uncertainty meant potential clients were holding off decisions,” Anthony says. “Cash flow was down to almost nothing and we were eating into reserves.”

All but one of the company’s six staff were let go - then the one remaining had an accident and could not work. Anthony consulted liquidators.

But after three months the Brexit uncertainty lifted and Anthony closed £120,000 of business in a month, including a regular £5,000 monthly retainer.

By Christmas the team was back up to six and is now up to 20, with plans for more, and the business aims to triple its turnover in three years.

Anthony says: “I learnt that we should create ways to get data such as cash flow, the lead pipeline and conversion rates - we now have a dashboard that is monitored regularly so we can plan ahead. “We should also keep our eye on the competition all the time and never stop marketing. It’s tempting to cut back on it in hard times, but cutting back is the last thing you should do when times are tough.” Read more like this

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