The Downward Spiral - How to Spot it Early and Recover

Running a business is challenging, cash rarely flows in a steady stream and costs can rise sharply and unexpectedly making managing liquidity difficult. The majority of businesses will go through peaks and troughs of growth. But how to distinguish between a temporary dip and a terminal decline? Being aware of potential dangers from a very early stage can be the key, so here we set out some pointers to look out for and some suggestions for sound business management.

POTENTIAL DANGER - growing too fast – often referred to as “over-trading”

This is when a business is driven by sales without considering its cash flow and ability to fund the orders. Often suppliers demand shorter credit terms than customers are given. Pressing creditors and tardy payers create a perfect storm when the business cannot pay its bills due to the gap between cash received from sales and cash paid out. To avoid this situation regular and timely monitoring of cash flow statements is essential. Good credit control is essential. If a cash flow gap is anticipated in advance, with good management information to back up the numbers, it may be possible to obtain short-term funding to bridge the gap.

GRADUAL UNDERPERFORMANCE

This is when an apparently successful business - often a long established business - appears to be trading successfully but under the surface, there are warning signs. These can include: • Continual use of the overdraft with hardcore (where the balance never goes into credit) developing. • Lower profit margins • Overheads (often rent and rates) rising faster than revenue • Rising interest rates where businesses are borrowing, especially pertinent now interest rates are starting to rise after years of historically low rates. If you have a nagging feeling that your business is under the weather - take advice! Act early to identify the cause(s) of the decline. A licenced insolvency practitioner and business restructurer can help identify the root cause so appropriate action can be taken.

DISTRESS

If no remedial action is taken in the early stages an overextended or underperforming business can quickly slip into distress. This isn’t a crisis (yet) but professional help is needed sooner rather than later. Signs of distress include: • Cash flow - constant lack of money and juggling on a daily basis • High-interest payments - short-term “crisis” loans and banks raising rates because they consider the business high risk • Defaulting on bills – regular demands for payment and delaying HMRC liabilities such as VAT and PAYE • Extended debtor and/or creditor days – sudden changes in days payable or collectible must be investigated promptly • Falling margins – selling goods or services too cheaply to get cash in; buying from more expensive suppliers who offer credit – both warning signs • Unhappiness – of business owners and staff, who will quickly pick up on the signs. Good staff will leave - as they see it before the crunch comes.

CRISIS

If signs of distress are ignored then the business will hit crisis point. By the time the distress situation has developed into a full-blown crisis, there are fewer options open to the business owner. It is imperative that they seek professional advice - whether or not it is too late to save the business -but in any event, an insolvency practitioner can provide clear unbiased advice and support at a very difficult and painful time for a business owner.