Recognising The Signs That Your Small Business Is Heading For Trouble

The following ten questions will help you to determine if your business is the lean mean fighting machine you believed, or a bed-ridden sick note, coughing and spluttering its way on a wobbly pair of last legs.

1. Increase in staff turnover

If you've watched a number of your key employees walk away from the business recently you should sit up and take notice. Staff is arguably a company's most valuable asset and if your people are leaving, it's often the first sign that something is going wrong.

The problem is not just the associated cost of recruitment, but also training new starters and the additional burden on remaining staff while the new team members get up to speed, that add further strain on the business.

Remedy

One of the best ways to keep track of staff morale is to hold regular reviews where employees can air their views on both the business and their specific concerns without fear of recrimination.

2. You lose a key account

It's believed that winning a new customer is seven times more expensive than keeping an existing customer happy. Small businesses are often too reliant on a couple of main customers, as demonstrated in the recent collapse of MG Rover and Courts.

There are a number of reasons key accounts could defect: Your product or service is not of the standard promised or expected, or you could be beaten on price, quality or service.

Losing a key account can have a serious impact on your cash flow. Credit companies such as Experian offer a credit scoring service which can be invaluable when setting credit terms for key accounts. This is important: You wouldn't lend a stranger £20,000, so why offer new customers this kind of credit facility without checking their financial strength? In order to manage this risk further, there is a wide range of bad debt protection policies available which pay out in the event of your customer going under.

Remedy

Take a long, hard look in the mirror and discover the underlying reasons for your clients' lost faith. This way, you'll have a much better chance of either winning the client back, or at least making sure you don’t lose others going forward.If your customers' satisfaction isn't a priority for you already, it should be now! Paper trails for every transaction can be an extremely effective way to guard against disputes and to keep an eye on quality control. Obtain written purchase orders to back up your invoices and always get a signoff from the customer to say goods have been received or a service completed satisfactorily.

3. Orders are rising fast

This is not something that would be immediately cited as a sign of problems. However, when your business is growing quickly you need to be even more careful about your cash flow.

We've all heard the phrase "cash is king" and this is never more true than when you're struggling to keep up with increasing demand for your products or services.While most resources will be occupied meeting that demand, it is worth remembering the income from these orders may take three to six months to come in. That means you’ve got to be able to cover your costs for at least that period to keep the business afloat.

Remedy

Two of the most effective ways to manage your long term cash flow are to use factoring or invoice discounting services and to lease your manufacturing or office equipment.Factoring and invoice discounting raises up to 90% of your invoice value 'up front', enabling you to invest back in the business. You get the remaining monies when your customer pays the debt, less a fee.

4. Waiting longer for payments

If your customers are taking longer to pay your invoices but you’re still working to fulfil a growing order book, you're going to start having problems. And it may happen sooner than you think.

A customer who puts in repeat orders is important for your business success. However, if they take too long to pay, you have to ask if it is worth accepting their next order until some agreement has been made about payment.

Remedy

Too few small businesses employ a designated credit controller to collect invoice payments and chase up late payers. If you're starting to notice customers taking too long to pay, it’s worth sitting down with them and discussing the reasons.Business is built around mutually beneficial relationships and the better you, your suppliers and your customers understand each other, the more flexible the relationship will be.

Be understanding when you're asking for payments but remember that you have rights, including being able to charge interest on overdue invoices. Make sure that all credit terms are stated on each invoice, along with the due date for payment. If you don’t, your customer can quite rightly say they didn’t know when they had to pay.

Remedy

Factoring companies can also collect your outstanding debts. They'll effectively buy your outstanding invoices, release up to 80% of the value and take their fee from the remainder when payment is collected. If you do not need an external credit control facility but would still like the funding it can generate, an alternative product is available called invoice discounting.

5. Unrealistic assets on your balance sheet

Many businesses have valuable assets on their balance sheet, including machinery or equipment owned outright. All assets depreciate over time – how long has it been since your business assets were valued?Out of date and inaccurate valuations make a business look healthier than it actually is and may cause problems when you're looking for growth investment or calculating your profit and loss statement.It's also worthwhile considering that older assets lose their market value very quickly and can start costing more in operating and maintenance costs.

Remedy

Leasing and asset finance services can help simplify cash flow by enabling you to use the equipment you need without actually owning it outright. This financing mechanism is available for both existing and new machinery.

6. Increasing stock levels

Unused and unsold stock isn't just cash tied up in the business, it’s also a depreciating asset with a diminishing return on the money you invested to produce it. In other words, it’s a waste of money.

Although this is more relevant to manufacturing businesses, the underlying factors behind this problem should be a concern for all businesses – if you’re producing something that isn’t selling, how long do you expect to last?

Remedy

Keeping a close eye on patterns of supply and demand and having the flexibility to adjust to these changes is the difference between a growing business and a dying business. By automating your ordering process. wastage is minimised and the business has moves closer to a just in time delivery structure.

7. Cutting prices

While a popular tactic for promoting new products or gaining short-term market share, reducing your prices without cutting your production costs can seriously damage your business prospects.

Remedy

Instead of cutting prices if sales start to fall, try to find the reason sales have slowed. It’s possible that your market sector has reached saturation point or it could be a problem with the quality or perceived value of the product.

There are a number of ways to differentiate products from the competition. There might be an alternative to cutting prices that will strengthen your business and its prospects, rather than eating into your profit margins.

It’ often worth spending a bit of money to market your product more effectively, or by hiring a designated sales person to reverse the downturn in sales.

8. Rising debts and slowing growth

Getting into more debt is not the best way to finance business growth. The quicker you can get your business trading on profits rather than debts, the better.That said, some forms of borrowing are more sustainable than others and can reduce the time it takes your business to begin trading on your profits.

The debt to asset ratio of the business becomes serious when your assets (including book debt) are outweighed by liabilities (including creditor’s ledger and longer term liabilities such as director’s loans).

Remedy

VAT and PAYE payments are often tricky to keep on top of if you are experiencing a change in your sales volumes. While many companies pay their VAT quarterly, if it might be easier to pay monthly. Many VAT offices will be happy to change to this structure.

The Crown has lost its preferential creditor status and so is under increasing pressure to secure payments from companies which look a little shaky. If you do anticipate problems paying the Crown, you should immediately meet your tax officer to discuss a payment plan.

Agree in writing to clear your arrears and guarantee future payments. As long as you stick to the terms, this should stave off further action from the Crown on outstanding monies.

Most businesses have a number of assets that can be used to secure much-needed capital – including your outstanding invoices, machinery, equipment or company vehicles. Two of the most effective ways to manage your long-term cash flow are to use factoring or invoice discounting services and to lease your manufacturing or office equipment.

Factoring is essentially selling your outstanding invoices to a company that will release a percentage of those funds immediately for you to invest back in the business, for a fee.

Also, don't be afraid to have another look at your business plan. The most successful businesses have management teams that can spot opportunities and have the flexibility to adapt to these opportunities.

Don't rely on your yearly accounts for the day to day financial management of your firm. Even simplistic management accounts, if kept up to date, can be invaluable.

9. You don't admit the truth

Are you still trying to convince yourself that everything will be alright? Do you find yourself hiding from bills and avoiding contact with your accountant, investors and staff?

Covering up the truth about your financial situation will not only stop you getting out of the mess you’re in, it may get you into deeper trouble. Investors aren’t going to penalise you for getting into problems – every business faces financial difficulties– but if they don’t know what's going on, they can't help.

Remedy

Investors will be far more likely to help if you are open and honest with them, so that potential problems can be caught earlier rather than later.

Your investors will have put a significant amount of money into the business and would undoubtedly prefer to invest more money than to lose it all because they were never told of the difficulties.

10. It's not fun anymore!

Think back to the reason you first got into your business. It's generally because of the excitement and the challenge, rather than the opportunity to make a quick buck.

If you wake up in the morning and can’t stand the thought of going to work or is it that the company has evolved beyond your interest or control, then perhaps it’s time to consider getting out.

Many entrepreneurs enjoy the challenge of getting a company off the ground but once the business has become reasonably self-sufficient, they lose interest and need to move on to the next challenge.

Remedy

Perhaps it's time to start thinking about how you can start delegating more authority to employees that you trust as part of your exit strategy.By giving some of your key employees the authority to make decisions, you can free up more of your time to concentrate on the parts of the business that still excite you, and potentially even get the passion back that made you start the business in the first place.

The main thing to remember in all of these cases is that they do not necessarily mean that your business is on its last legs. If you catch any of these signs early enough, they can all be turned around so the business ends up stronger in the long run.

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Copyright © 2006 Jonathan Farrington. All rights reserved