Headed for financial trouble? Spotting the warning signs could make all the difference

Insolvency

Business insolvency is a very real risk for many small businesses but countless business owners are not spotting warning signs early enough. The reality is that around 60% of businesses don’t make it past the first three years, which is why business owners should seek help early on to ensure their financial health.

But first, business owners have to be realistic about their financial situation. Too many look at their bank accounts, see they have money and assume they’re doing well without taking accumulated creditor and tax debt into consideration. Others believe ‘the next big sale’ will solve systemic problems while facing mounting business debts.

No one plans for failure, but life happens. From economic fluctuations and unexpected debts to even relationship breakdowns and an insolvent debtor, so many of life’s unforeseen events could change everything – including your business buoyancy.

Here are six tips to help your business thrive and reduce risk of insolvency.

1. Preparation is key

New technology has lowered the barrier to entry for business hopefuls but that doesn’t mean you should rush in. You wouldn’t you run a marathon without doing training and the same goes with starting a business. Preparation is crucial. Do your research on the market and what’s involved. Take into consideration all the aspects of running a business, put together a business plan and a formal financial model.

2. Focus on cash flow

Struggling with a day-to-day cash flow deficit puts a strain on your entire business and limits growth. Implementing a solid billing and debt collecting system will inject much-needed circulation of funds. With ‘credit clients’, ensure you have well drafted trading terms in place, specifically applicable to your business, to allow early and effective intervention when those terms are not adhered.

3. Watch for warning signs

It’s easy for business owners to get bogged down in operations, often missing key warning signs of failing health. Keep an eye out for increasing debts, overdue tax and super payments, mounting stock levels, high staff turnover and problems securing finance. It’s good to put in place reference points – e.g. 3 months, 6 months, 12 months – and if you start going off track, you need to seek expert advice.

4. Explore ways to reduce your overhead costs

Explore creative ways to reduce your overheads such as, negotiating cheaper insurance premiums, revisiting utilities expenses regularly, investigating alternative supplier relationships.  The more money that can be saved, the more that can be used for growth or put towards reducing debt. This will increase your financial attractiveness, and when your creditors see you’re serious about paying them back, they might be more willing to negotiate to more favourable terms for the relationship.

5. Negotiate with your creditors

Continually review your trading relationships.  As with your customers, it is important to negotiate the trading terms of your relationship with your suppliers. Trade credit is not a right, but likewise your suppliers will acknowledge and support the businesses that understand the symbiotic relationship – as you grow, they grow. With the help of a financial specialist, you may be able to reach an arrangement with your creditors such as providing you with reduced personal risk, increase repayment periods or early payment discounts.

6. Get advice

If you only seek help once the piggy bank has been cracked open and the lounge cushions flipped, you limit the options available to make effective adjustments to preserve a business. If you suspect your business is in financial difficulty, it’s important to get proper accounting and legal advice as soon as you can.  A business owner can turn around a struggling business by working on ways to generate cash flow and build profits. But in times of financial distress comes high emotion. It’s important to take emotion out of the equation and do a critical review of all areas of your business and this is where independent advice can help guide business owners to the right path.


About the author

Andrew Spring, Partner, Jirsch Sutherland has more than 17 years’ experience in corporate recovery and insolvency, gained through work in the UK, Europe and Australia. He has a wealth of experience in all facets of domestic and international business restructuring and insolvency. His specialist skills include independent business reviews, reconstruction and turnaround consulting, business sales and asset divestment, profitability reviews, cross-border insolvency, and all forms of corporate insolvency appointments.