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Signs that your company is struggling financially

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Charles Brook

Statistically, most businesses fail in the first few years of operation.  Not all end in a formal procedure; many simply fail to thrive but a significant proportion get into financial trouble, often because the early signs are overlooked or not recognised.  More new businesses than ever before are being started by inexperienced owners who don’t appreciate that a high volume of sales, doesn’t necessarily mean that they are doing well financially.  It’s important to be aware of these early warning signs and take immediate measures to turn things around before it’s too late.

Charles Brook

Charles Brook

  1. Regularly paying your bills late

Paying invoices late or being behind on loan or debt payments may just be the result of a temporary cash-flow issue but, if it lasts for more than a few months, then it’s a sign that trouble is being stored up and your business will be more vulnerable to failing if other problems arise before it’s sorted out.  Look over your budget and plan a new one with a cost-cutting scheme to make sure that can cover your expenses and get payments back on track.

It might be that your original budget was wrong and the best course is to revamp it to accommodate your true business needs.

  1. Struggling to make profit

When your profit margins are down, this may put a squeeze on your cashflow and lead you to look for external sources of funding; this can open up a whole new area of risk.  Borrowing to sort out a shortage of cash may be a good short-term measure but, if the shortage is due to poor margins, the cost of borrowing will only make the problem worse.  It’s surprising how often new business owners miss the signs of weak profitability or rush to borrow in an attempt to improve the symptoms.

Ideally, you need to generate income faster than you spend it, which means getting paid by your customers as quickly as possible.  Good turnover on low margins isn’t a healthy situation unless you get paid immediately and if late payers or bad debts are forcing you to pay your own bills late it can soon spiral into a financial nose-dive.

A poor customer is little better than a bad customer but if you can encourage them into better habits you will be doing yourself and them a favour. 

  1. Digging into your own pocket

During the start-up phase, it is very common for an entrepreneur to have to dig into their own funds to finance things but once the company is established you shouldn’t have to pay for anything out of your own pocket on a regular basis.  It can be a warning sign of a real crisis if this is happening.

It’s best to be smart about this and avoid the risk of going completely bankrupt, potentially losing both your business and your personal assets.  If you can see a rapid positive change coming up, using your own funds to ease cash flow can be a cost-effective temporary solution, but not a long-term solution. You should consider other options or realise that you are heading for trouble and think about an exit strategy.

This isn’t an exclusive problem of young businesses, older enterprises that have been profitable and built up reserves can find these dwindling if the business starts to decline; in this situation the options may be more varied but the outcome is likely to be the same if the situation is left unchecked.

  1. Declining sales growth

Your rate of sales increase should be higher year on year than your rate of increase in overheads and cost of sales and if it isn’t, then it could indicate a financial problem. Although it is natural for growing companies to see their rate of growth go down temporarily from time to time, if it goes down and remains in decline you should have cause to start worrying.

Accountants or financial advisors should be used for more than just bookkeeping. They can give you advice about your revenue and profitability problems and help you come up with a better plan.  Remember that they will probably have experienced this with other clients and will be delighted if you turn to them for assistance.  You are their most important asset, without you and other clients like you they don’t have a business themselves.

  1. Nocapacity for salary increases

If a business can’t invest in its talent pool and deliver wage rewards it is a sure sign of financial stress. Meeting market wage expectations helps to maintain employee morale and minimise staff turnover.  Recruitment costs, training downtime, sickness and potential client service issues can be more financially damaging to a business than paying acceptably.

Employees that feel cared for will be more understanding and supportive of you if times get difficult in the future, perhaps more prepared to accept a reduction in hours or to contribute extra effort when the need arises.

It can be important to trim costs from time to time but some costs are crucial to keeping your business alive and letting go of these, as well as potentially important people,is likely to hit the quality of your product or service.   If cost-cutting becomes critical and the advantages are small it is time to take advice or consult a Licensed Insolvency Practitioner to check your options.

If you find yourself seeing any of these signs, do not hesitate to get in touch for a chat with one of our team. Our initial advice is free and we are happy to guide you in the right direction.

 Charles Brook

Partner, Poppleton & Appleby

Licensed Insolvency Practitioner and Business Recovery Specialist

Business

Euro zone business activity shrank in January as lockdowns hit services

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Euro zone business activity shrank in January as lockdowns hit services 1

By Jonathan Cable

LONDON (Reuters) – Economic activity in the euro zone shrank markedly in January as lockdown restrictions to contain the coronavirus pandemic hit the bloc’s dominant service industry hard, a survey showed.

With hospitality and entertainment venues forced to remain closed across much of the continent the survey highlighted a sharp contraction in the services industry but also showed manufacturing remained strong as factories largely remained open.

IHS Markit’s flash composite PMI, seen as a good guide to economic health, fell further below the 50 mark separating growth from contraction to 47.5 in January from December’s 49.1. A Reuters poll had predicted a fall to 47.6.

“A double-dip recession for the euro zone economy is looking increasingly inevitable as tighter COVID-19 restrictions took a further toll on businesses in January,” said Chris Williamson, chief business economist at IHS Markit.

“Some encouragement comes from the downturn being less severe than in the spring of last year, reflecting the ongoing relative resilience of manufacturing, rising demand for exported goods and the lockdown measures having been less stringent on average than last year.”

The bloc’s economy was expected to grow 0.6% this quarter, a Reuters poll showed earlier this week, and will return to its pre-COVID-19 level within two years on hopes the rollout of vaccines will allow a return to some form of normality. [ECILT/EU]

A PMI covering the bloc’s dominant service industry dropped to 45.0 from 46.4, exceeding expectations in a Reuters poll that had predicted a steeper fall to 44.5 and still a long way from historic lows at the start of the pandemic.

With activity still in decline and restrictions likely to be in place for some time yet, services firms were forced to chop their charges. The output price index fell to 46.9 from 48.4, its lowest reading since June.

That will be disappointing for policymakers at the European Central Bank – who on Thursday left policy unchanged – as uncomfortably low inflation has been a thorn in the ECB’s side for years.

Factory activity remained strong and the manufacturing PMI held well above breakeven at 54.7, albeit weaker than December’s 55.2. The Reuters poll had predicted a drop to 54.5.

An index measuring output which feeds into the composite PMI fell to 54.5 from 56.3.

But despite strong demand factories again cut headcount, as they have every month since May 2019. The employment index fell to 48.9 from 49.2.

As immunisation programmes are being ramped up after a slow start in Europe optimism about the coming year remained strong. The composite future output index dipped to 63.6 from December’s near three-year high of 64.5.

“The roll out of vaccines has meanwhile helped sustain a strong degree of confidence about prospects for the year ahead, though the recent rise in virus case numbers has caused some pull-back in optimism,” Williamson said.

(Reporting by Jonathan Cable; Editing by Toby Chopra)

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Business

Volkswagen’s profit halves, but deliveries recovering

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Volkswagen's profit halves, but deliveries recovering 2

BERLIN (Reuters) – Volkswagen reported a nearly 50% drop in its 2020 adjusted operating profit on Friday but said car deliveries had recovered strongly in the fourth quarter, lifting its shares.

The world’s largest carmaker said full-year operating profit, excluding costs related to its diesel emissions scandal, came in at 10 billion euros ($12.2 billion), compared with 19.3 billion in 2019.

Net cash flow at its automotive division was around 6 billion euros and car deliveries picked up towards the end of the year, the German group said in a statement.

“The deliveries to customers of the Volkswagen Group continued to recover strongly in the fourth quarter and even exceeded the deliveries of the third quarter 2020,” it said.

Volkswagen’s shares, which had been down as much as 2%, turned positive and were up 1.5% at 164.32 euros by 1158 GMT.

Sales at the automaker rose 1.7% in December, at a time when new car registrations in Europe dropped nearly 4%, data from the European Automobile Manufacturers’ Association showed.

Like its rivals, Volkswagen is facing several challenges due to the coronavirus pandemic as well as a global shortage of chips needed for production.

It also sees tough competition in developing electrified and self-driving cars. The merger of Fiat Chrysler and Peugeot-owner PSA to create the world’s fourth-biggest automaker Stellantis adds to the pressure.

Volkswagen said on Thursday it missed EU targets on carbon dioxide (CO2) emissions from its passenger car fleet last year and faces a fine of more than 100 million euros.

The group is expected to release detailed 2020 figures on March 16.

($1 = 0.8215 euros)

(Reporting by Kirsti Knolle; Editing by Maria Sheahan and Mark Potter)

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Global chip shortage hits China’s bitcoin mining sector

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Global chip shortage hits China's bitcoin mining sector 3

By Samuel Shen and Alun John

SHANGHAI/HONG KONG (Reuters) – A global chip shortage is choking the production of machines used to “mine” bitcoin, a sector dominated by China, sending prices of the computer equipment soaring as a surge in the cryptocurrency drives demand.

The scramble is pricing out smaller miners and accelerating an industry consolidation that could see deep-pocketed players, many outside China, profit from the bitcoin bull run.

Bitcoin mining is closely watched by traders and users of the world’s largest cryptocurrency, as the amount of bitcoin they make and sell into the market affects its supply and price.

Trading around $32,000 on Friday, bitcoin is down 20% from the record highs it struck two weeks ago but still up some 700% from its March low of $3,850.

“There are not enough chips to support the production of mining rigs,” said Alex Ao, vice president of Innosilicon, a chip designer and major provider of mining equipment.

Bitcoin miners use increasingly powerful, specially-designed computer equipment, or rigs, to verify bitcoin transactions in a process which produces newly minted bitcoins.

Taiwan Semiconductor Manufacturing Co and Samsung Electronics Co, the main producers of specially designed chips used in mining rigs, would also prioritise supplies to sectors such as consumer electronics, whose chip demand is seen as more stable, Ao said.

The global chip shortage is disrupting production across a global array of products, including automobiles, laptops and mobile phones. [L1N2JP2MY]

Mining’s profitability depends on bitcoin’s price, the cost of the electricity used to power the rig, the rig’s efficiency, and how much computing power is needed to mine a bitcoin.

Demand for rigs has boomed as bitcoin prices soared, said Gordon Chen, co-founder of cryptocurrency asset manager and miner GMR.

“When gold prices jump, you need more shovels. When milk prices rise, you want more cows.”

CONSOLIDATION

Lei Tong, managing director of financial services at Babel Finance, which lends to miners, said that “almost all major miners are scouring the market for rigs, and they are willing to pay high prices for second-hand machines.”

“Purchase volumes from North America have been huge, squeezing supply in China,” he said, adding that many miners are placing orders for products that can only be delivered in August and September.

Most of the products of Bitmain, one of the biggest rig makers in China, are sold out, according the company’s website.

A sales manager at Jiangsu Haifanxin Technology, a rig merchant, said prices on the second-hand market have jumped 50% to 60% over the past year, while prices of new equipment more than doubled. High-end, second-hand mining machines were quoted around $5,000.

“It’s natural if you look at how much bitcoin has risen,” said the manager, who identified himself on by his surname Li.

The cryptocurrency surge is affecting who is able to mine.

The increasing cost of investment is eliminating smaller players, said Raymond Yuan, founder of Atlas Mining, which owns one of China’s biggest mining business.

“Institutional investors benefit from both large scale and proficiency in management whereas retail investors who couldn’t keep up will be weeded out,” said Yuan, whose company has invested over $500 million in cryptocurrency mining and plans to keep investing heavily.

Many of the larger players growing their mining operations are based outside of China, often in North America and the Middle East, said Wayne Zhao, chief operating officer of crypto research company TokenInsight.

“China used to have low electricity costs as one core advantage, but as the bitcoin price rises now, that has gone,” he said.

Zhao said that while previously bitcoin mining in China used to account for as much as 80% of the world’s total, it now accounted for around 50%.

(Reporting by Samuel Shen and Alun John; Editing by Vidya Ranganathan and William Mallard)

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