Early warning signs a business could be in trouble.
The red flags to look out for – and what to do when you spot them.
We’ve successfully helped many businesses out of tight spots over the years, but the one phrase you’ll hear us say more than any other is this:
“If only they’d come to us sooner.”
You see, many people view us as the undertakers of the financial sector – a necessary service, but you only darken their door when you absolutely have to. When you need help to say your last goodbyes.
However, in many cases, if businesses come to us at the right time it’s more like visiting the GP. You still might not relish the prospect, but a good insolvency practitioner can diagnose the problem, send you away with a prescription or refer for early treatment.
Maybe we’re wringing the metaphor a little, but it’s true that the earlier you tackle a problem, the simpler and more effective the solution tends to be.
In our experience, the following ‘red flags’ are often-ignored warning signs that a business could be in the early stages of struggling with its liquidity.
RED FLAG: Bills? I’ll get round to VAT
It’s so easy for a business owner to tell themselves they’ll ‘get round to that’ when it comes to paying their VAT bill. We get it – they’re busy. They just need to wait for one more invoice to be paid, or just sort that one last bill. They just want to get this supplier, or that contractor off their back first.
It’s tempting to use VAT as a short-term source of cash flow and then put off paying the bill just one more week, one more month, another quarter. And often, it’s a blip – that bill gets paid and everything does get back on track.
But it’s risky to regard VAT as another source of cash flow; and a business that puts off or avoids paying its VAT bill is doing exactly that.
RED FLAG: Give me some (more) credit!
Negotiating favourable credit terms – whether it’s having your own invoices paid promptly, or ensuring you have a decent amount of time to settle your own bills – is just good business.
But a business that increasingly wants to be paid more quickly and/or repeatedly attempts to renegotiate longer terms to settle its own debts could well be in the early stages of struggling with liquidity.
RED FLAG: Don’t bank on it…
One failed payment does not necessarily mean a business is in hot water, but more than one, or an emerging pattern of bounced cheques and direct debits is a bright red flag that cash flow isn’t what it should be.
A director using personal credit cards to finance business expenses is also something we would flag up as a concern. Propping up the day-to-day operations with personal debt is an expensive and ultimately ineffectual way to deal with cashflow issues.
Increasing a business overdraft can be a smart way to borrow short-term, but living in an overdraft can be another early indicator of possible solvency issues.
SO – WHAT NOW?
If you spot one of the red flags in a business (whether it’s yours or someone else’s) – what should you do? Rather than burying their head in the sand, this is the perfect time for the owner or director of that business to put their hand up for some help.
Business leaders are often so caught up in the day-to-day running of the business that they have neither the time nor the resources to take a step back and look at the bigger picture of their liquidity.
Just the act of putting together or sourcing a proper cashflow forecast can help you to identify your cashflow weak spots and prevent them spiralling into debt problems.
Outsource the admin
We’ve met so many brilliant business people whose only fault is that they struggle with the administrative tasks required to keep a business in the black.
A sole trader or small operation should consider taking on a part-time employee or sourcing a virtual assistant to look after things like invoicing, expenses, credit control and financial paperwork.
Independent Business Review
An independent business review is an in-depth overview of the business’s cash position. It’s a comprehensive and structured way to plot a route back to cash health.
Most good banks offer this service to their business customers. A good IP can help you with this too. They’ll take a look at:
- Bank statements – for regular income and outgoings
- Spending patterns
- Invoices and debtor lists
This allows them to create a comprehensive cashflow forecast, alongside a practical plan for improving cashflow and managing debt and outgoings.
If you recognise yourself or someone you know in these red flags – please don’t panic. Get in touch today and see if we can help.
If there’s any other finance, cashflow, bankruptcy or insolvency question you think we should tackle on the blog – let us know! Drop a line to firstname.lastname@example.org or join the conversation over on our Facebook, Twitter, Instagram or Linked In.