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10 things to watch out for - Is your business in trouble?
Cash flow difficulties
Need equity or refinancing
Want to merge or sell your business
Can't support your lifestyle
Management in dispute
Marital difficulties
Loss of a major customer
Problems with an insurance claim
Onerous Leases
Rapid Growth
Any one or more of these can signal that your company is in trouble. Each point is explained in a little more detail below but if one or more of them are issues you recognise it might be wise to pick up the phone.
1. Cash flow difficulties
Short term cash flow difficulties can be overcome with proper financial management. Timing is an important issue in managing a business. Producing accounts is one thing, but understanding how to read the numbers and what they mean to a business is a critical skill that many managers/owners do not have. Often cash flow difficulties is one of the last indications of a business in trouble especially when monthly management accounts are not produced and the cash flow problems not predicted.
2. Need equity or refinancing
An insolvent business or a business in crisis normally sets about trying to resolve their financial difficulties by finding investment or finance of some sort before any other solutions. If the business is successful in attracting finance it may not necessarily sort out the fundamental problems of the business and could just be delaying the inevitable. With effective management some financing needs can be managed or averted completely.
3. Want to merge or sell you business
We are seeing a lot of businesses merge, consolidate and centralise cost, particularly in the current climate. This can be a good strategy when approaching trouble but a business still needs to deal with the fundamentals of its own business 'does the model work'? Conflicts often arise between a merged business as a result of business cultures and this is yet another issue to manage.
4. Can't support your lifestyle
Often small owner-managed businessmen make a fundamental mistake and equate cash with profit. Too much money is taken out of the business. Personal lifestyle is a critical issue for those businesses. Often we see creditors of businesses funding the director's lifestyle. Not only is this morally wrong but it also constitutes breaches in the director's duties. If personal lifestyles are excessive or cannot be funded properly it is often a good indication of trouble.
5. Management in dispute
All too often we see management in deadlock. This never helps a business and in the long term always compounds the problem. Whilst debate is useful and healthy, disputes taking place on a regular basis (or worse still to the point of no communication) are a sure sign that the business is destined to fail.
6. Marital difficulties
Board room stress easily converts to bedroom stress! This is only natural but it is important to recognise the warning signs and understand them for what they are. The earlier the business finds a solution the quicker calm returns to the home and personal environment. Stress at home and at work is unhealthy not only for the business but also for the individual.
7. Loss of a major customer
Often businesses have one or two key clients. A common mistake is to rely on those clients or customers without preparing for those customers to go out of business. It is wiser to be prudent and assume they will fail as it means that your business is less vulnerable to losing only one customer. Losing one major client can often make the difference between a business sinking or surviving. We call this the Domino Effect.
8. Problems with an insurance claim
This is not the most obvious pointer but often we find that a company that enters into an insolvency procedure has a number of insurance claims as well as litigation issues outstanding. These can be distracting and time wasting for the business which often should rely on its core business.
9. Onerous leases
Often, in order to try to stay dynamic, a business needs to be able to react to market change. Businesses are usually caught with obligations they cannot immediately get out of and although negotiation has been tried, it failed. This onerous obligation creates a financial drain on the company and usually tips the balance to the red when the rest of (say) cost cutting measures have been implemented correctly.
10. Rapid Growth
Rapid Growth is perhaps the worst culprit for toppling businesses. A great business concept has been conceived, the business stated, hours of hard work, limited funding and then it grows beyond what has been expected. This is every entrepreneurs dream but managing that process without running out of cash is not only hard, but critical to surviving the cost of rapid company growth. Timing and projections are of course important here but rapid growth is regularly misunderstood or commonly mismanaged.
Any one of these (and the list is not exhaustive) can put a business out of business. In my professional experience I have seen the effects of one or more of these pointers time and time again. They affect every business large and small; sole traders right up to large corporations.
The importance to surviving, I believe, is led by a number of key factors:
Understand the key driving factors to your business and the implications if any of those change.
Forward plan and constantly review that plan to adjust and re-plan. (Cash flows and reasonable projections are critical).
Recognise problems and address them - never hide from them.
Be prepared to act and be honest.
Seek advice from professionals and if needs be have a back up plan 'A disaster Strategy'.