By Rick Smith, MD at Forbes Burton

It’s often said that you don’t know that you’re aware of how bad things have become until you take a step back from a situation. While this is great when looked at from the privilege of hindsight, there’s a lot you can do to avoid a crisis in business. Rick Smith, MD of Forbes Burton, a business rescue and insolvency specialist, explains what to look out for and how to plan ahead to avoid it.

It’s worrying how easily a company can get into financial difficulties. During these post-COVID times, it’s becoming clear that many companies, although managing to cope during more relaxed trading times, are finding the new landscape either impossible or very difficult to navigate.

Most of the time, the way businesses are run may not be the direct cause of this, as it could be caused by conditions which are often completely avoidable.

Significant clients can be lost, industries can be in a state of a serious recession, or you might be in debt due to non-payment of a major bill.

Whatever the cause of the problems in your business is, it is important you know what to look for when they are about to occur.

There are several warning signs businesses should be aware of:

Cash flow problems: Weak cash flow has caused many businesses, even seemingly sturdy and successful ones to die. Periods when too much money flows out at a time or when incoming payments are late can take a heavy toll on operations in your business. If you find yourself struggling to pay suppliers, employees and HMRC on time, chances are you already have a weak cash flow. Recent events will only have exacerbated this, with consumer confidence less buoyant than usual, it is no wonder that many are suffering from this setback.

Trade slowing down: A lack of incoming orders or an increase in stock levels can spell a real downturn in trade. Again, the impact of Coronavirus is resulting in many people tightening their belts and a lack of certainty for the future is adding up to a cracked, unsure market for nearly all professions.

When this happens and if you have the luxury of time, this is a great time to take stock. Whether your opposition is destabilising you, your services and products are now obsolete, or the industry is in a whole different place from where it used to be, find out why and look into ways you can meet this challenge head-on.

Needing longer payment terms: A sure sign of trouble, this kind of strategy can be a definite sign that cash flow isn’t quite working out. Not being able to meet up with due dates for debts payment is often an indication that a business is technically insolvent. If this is the case, you need to get a professional to check your business out before it’s too late to take action.

Customers paying late: Even if a business is generating a healthy amount of orders, not being paid means this is effectively moot. Cash flow could be seriously affected by delayed payments, and outstanding invoices reduces chances of getting paid at all. Ways to mitigate this is to ask for deposits for services or to create payment plans.

Key staff leaving or major contracts ending: Losing big contracts and equally big employees can be a sign of change and also a step in an unknown direction. Staying calm is the big challenge here and looking at the future objectively is where some businesses often fall down.

Efforts should be being made at the moment to retain staff and if there are gaps to fill, recruitment solutions are often the best investment option. At the moment, many skilled individuals are circulating and seeking new opportunities thanks to the reductions many companies are having to make. It’s a rare situation, but it really is an employer’s market at the moment.

Additional borrowing: Looking for additional funding is good for expansion, but could act as another red flag. Businesses are often unaware of funding they are entitled to.

Acting quickly on the above is often the key to success, too often businesses bury their heads in the sand and are oblivious to the real problems they are encountering. Spotting the early signs and then accepting there is a problem is the first step.

How do you solve these problems?

Cash flow can be a real killer in business, especially when things are pressured, such as after a crisis we are experiencing right now. There are measures you can take to mitigate this and here are a few initial pointers:

Solve bad debts: Cash flow problems often stem from bed debts – those debtors that can’t be recovered.

Letting orders go unpaid too often or not making demands that are heard can lead to defaulted payments on their behalf; things do spiral quickly if action isn’t taken.

Companies should have credit control systems in place to collect any money that is owed in from customers. Prioritising the efficiency and effectiveness of this system is important, especially when the company is in its infancy. As long as businesses keep their books up to date, the process is straight forward.

Many companies simply need to set aside some time to administer reminder emails and letters, and to pass anything overdue to recovery firms in a timely manner.

Maintain organised bookkeeping: There is lots of information out there on the initial start-up costs of various businesses, but little about the working hours that an individual needs to put in for the first months and years, which are usually verging on the ridiculous.

If you are a small business, even a solo entrepreneur, then bookkeeping can take a back seat to everyday business. Many directors simply feel that they don’t have enough hours in the day and assume that they can catch up with this later.

This is often the root cause of cash flow problems – the sooner an issue is caught, the more likely you are to be able to rescue the business. How else can you be aware of any snags if the company books aren’t complete? The old adage of working on, rather than in your business is especially important here.

Take it steady: Growing a business too quickly can hurt the business by causing cash flow problems. Of course growth is positive, but if the company cannot keep up, then things can quickly spiral out of control.

This means simply being pragmatic and cautious. Many companies are keen to say yes to everything, but without much thought towards costs incurred that could mean a huge contract actually costs them. Banks will often cover cash flow gaps if intent can be shown of a large contractual agreement.

This will mean that credit terms can still be offered to the customer and the job will go ahead without a hitch. Fail to plan and results could mean avoidable situations like not enough cash to pay staff.

Price yourself correctly: It sounds obvious, but a lack of profit will of course lead to poor cash flow. Consistent profit losses will ultimately lead to the failure of a business, but the time that it takes to come to this will depend on a few factors.

Companies can survive without profit for a while if they have cash reserves as a result of previous profits, but a review is obviously needed of a company’s very existence if a profit can’t be drawn at all. Underlying problems or elements that are skimming off any chance of achieving a profit should be immediately dealt with. Any measures taken should either increase sales figures, price or lower costs.

Review your credit term issues: Customer credit terms which don’t line up with the suppliers’ credit terms are often a major issue in situations like this. These issues can quickly spiral into poor cash flow to the extent that company bills can’t be paid.

Misaligned credit terms could mean a supplier is demanding payment within 12 days, but a company has extended 20 days of credit to its customers. It’s not hard to see that cash flow problems could soon build up from this scenario.

In this situation, re-negotiating terms should be a first port of call, but this isn’t always easily done. The best alternatives to consider include offering discounts on early payments, offering early settlement discounts or 2-3% price reductions which are likely to entice early payments from customers.

Factoring in invoices: Instructing a financial body to ‘buy’ your invoices from s company can be agreed on a short-term or continuing basis. This way, the factoring company will pay the majority of the invoice amount upfront and chase the debtor themselves, effectively solving cash flow problems.

The next few months and beyond are going to be tough for businesses, sitting down and actually planning what you can do moving forward will be crucial.

A good planning framework that exists is SOSTAC – Situation, Objectives, Strategy, Tactics, Action, Control. There is more information about the SOSTAC planning framework here.

Businesses should really consider the following if they are to follow this route:

Situation: The first thing to do is take stock of what is actually going on, find out what has actually happened to the business, get the cash flow figures, talk to creditors and debtors and find out what their intentions are. Also find out what assistance is available, after all it is impossible to plan if the situation is unknown.

Objectives: Once all the information is to hand, businesses will be able to plan some objectives. The objectives will need aim high, keep the business going as it is, slow the business down to a lower level, stop business until the pandemic has stopped. Again, you will only be able to form this once you know the ins and outs of the business and marketplace. For example, it may not be realistic to keep the business going in its current form if the marketplace has dried up.

You need to try to keep to one or two objectives (one preferably) and make sure they are SMART (Specific, Measurable, Achievable, Realistic, Time-bound).

Strategy: Now you need to think about how are you going to reach the objective(s) you’ve just set – if you chose keep the business going a strategy may be to ensure cash flow is stabilised and there is enough money to pay staff etc.

If you think the best strategy would be to reduce the business operations until the situation is better you will need to look into furloughing staff, making sure there is enough cash to cover ongoing costs such as reserves or utilising any government backed loans or grants.

Tactics: The tactics cover the specifics of carrying out the strategy – what assistance can you get from the government, e.g grants or the interest free loans, and apply for these, you could also look at delaying payments to creditors for  six months (or reducing them), chasing  your own debtors, reducing costs where possible, etc. For the strategy mentioned above, ensuring there is enough cash flow to keep the business going, you could explore the tactics of applying for grants, loans, even invoice finance. You would probably also need to look at where savings can be made to reduce costs as much as possible.

Action: Now you get to the planning out of how you are going to put the tactics into action – include time scales and milestones of when the tactics are going to be implemented and who is going to carry them out. A useful way of putting this into a written form is by using a GANTT chart but writing them down on paper on a word document will work as well.

Control: Record who has done what and when, has the tactic worked and been put in place and finally has the objective been reached? Does anything need to be done differently? Make sure you get feedback from all those involved.

Finally, Remember that this is a plan and plans can be fluid and reactive so keep referring back to it, for example what the government are doing and how, where the pandemic moves/affects next will change things.

If applicable you also need to be planning what you are going to do when the situation recovers. The SOSTAC planning system will work for this too. For the situation part you can use your best judgement as to what the case will be like and adjust it when needed, the rest of the sections should then follow from this just as you have done for this plan.

Navigating your way through a crisis such as this isn’t easy and many big names are going to fall as time progresses, but there should be an emphasis on resilience and review. Those who can adapt and meet the challenges this is throwing out there will be ones that survive.