Business failure and how to recognise it before it is too late

Over 50% of businesses fail within the first 3 years. However this does not mean that businesses that pass their third birthday can become complacent. In many cases actions or omissions by suppliers and/or customers can lead to business failure just as quickly as actions or inaction of the owners/directors.

In this briefing paper we have identified some of the warning signs. We trust that few – if any of these apply to your business – however, the key is to be sure to check out your clients and suppliers for as many of these warning signs as you can – if you think they are heading for trouble – take pre-emptive action before they drag you down with them.

Finance. Cash is king – one of the main causes of business failure is not having enough cash at the right time – some of the warning signs include:

1.    A lack of working capital – juggling invoices and/or waiting for final demands
2.    Increases in overdraft without a compensating increase in sales
3.    Failure to control costs ruthlessly e.g. too many people responsible for purchasing
4.    Under-capitalisation (not investing enough into the business in the first place)
5.    Fatal leasing agreements
6.    Too heavy reliance on grants
7.    Loss of financial backing
8.    Poor stock control
9.    The business widening its range of suppliers simply to make more credit available
10.  Paying suppliers too promptly and allowing customers too long to pay
11.  Company directors spending too much money on frivolous purposes thus using up all available capital
12.  Personal extravagance

Credit Control – is your money in the wrong bank account? Will your customers go bust before they pay? Without firm credit control, your customers can drag your business into their own financial difficulties. Some of the symptoms to look for include:

13.   The business is unsure how much it owes and how much it is owed
14.   Slow payment by customers
15.   Non-payment by customers
16.   Poor collection of debtor book e.g. greater than 45 days
17.   Extended lines of credit
18.   Rising work-in-progress that is not billed on time

Marketing – the business may be have started out with the best of intentions but have market conditions changes so much that a new approach is required? Some of the warning signs include:

19.   A lack of orders
20.   General rise in costs
21.   Under pricing
22.   Potential or current customers quibbling too much over prices
23.   Failure to adapt product to meet customer needs
24.   Tougher market conditions
25.   Directors aiming to find new markets, but not making a single sale
26.   Inability to focus on a specific market because of poor research
27.   Companies diversifying into new, unknown areas without a clue about costs

Strategy – To fail to plan is to plan to fail. Some businesses fail because:

28.   Unable to grow – Businesses that merely attempt stability or have even less ambitious objectives, generally do not survive
29.   A failure to plan ahead beyond the day-to-day running of the business
30.   Failure to gain new markets
31.   Failure to notice shrinkage within current market until too late

Poor Management – poor management can show up in several areas. It is very likely that poor managers in one area are happy to allow poor standards in other areas – a slippery slope… Look out for:

32.   Poor quality of product or service
33.   Too many returns, too many items that cannot be invoiced
34.   Bad labour relations – good employees leaving

Competitors – there can be usually be enough room in the market for several players – but only if you have done your marketing homework!

35.   Companies finding that staff set up as rivals and stealing the business
36.   Loss of market share – previous customers go elsewhere

Dishonesty – if you see it been done to someone else, assume they will do it to you too! Examples include:

37.   VAT inconsistencies
38.   Over-billing

Compliance, Statutory & Legal Issues – Do not even go there…

39.   Failure to pay crown taxes (PAYE and VAT)
40.   Tax liabilities
41.   Legal disputes – even in cases where the issue is supposedly straightforward the cost and effort always distracts managers from their real job.

Of course you need to be sure you are monitoring your own performance and can recognise any indication of choppy waters ahead of time. The best way to achieve this is to have key indicators that you monitor on a monthly (or weekly basis). These indicators will vary depending upon what type of business you run – for help in determining how and what to measure please call 0845 054 5061 and mention this briefing paper.

Disclaimer: The information in this article is for obvious reasons generic in nature. You are advised to seek professional advice before implementing any of the above.

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