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The benefit of hindsight is a wonderful thing. It often helps to get the perspective of an expert and recently I heard from an insolvency practitioner (liquidator) who came up with a list of 22 warning signs of trouble in a business.
We all want to stay positive and not talk ourselves into a recession, but it pays to be realistic. These signs are not meant to alarm, but to alert you to the need for some proactive steps, rather than waiting until it’s too late.
Here are the 'Business-in-Trouble' Signs
1. Your overdraft is near or at its limit for a significant period of time
2. Difficulty meeting your suppliers payment terms
3. Staff spending time on telephone with suppliers about outstanding payments
4. Suppliers are threatening COD terms or stop supply
5. Suppliers putting your business last for service priority
6. Cheques dishonoured by your bank
7. Suppliers issuing demands or threatening legal action
8. Creditors balance increasing whilst debtors and inventory/WIP remaining static
9. Difficulty paying GST and payroll tax deductions to Tax Office
10. Hesitation to lodge GST returns due to funds being required elsewhere in business
11. Correspondence received from Tax Office about outstanding GST lodgments or overdue payments
12. Needing to sell capital assets to fund ongoing trading
13. Unable to place orders for stock due to cash constraints
14. Staff morale down due to perception of cashflow difficulties
15. Higher than normal staff turnover as a result of above
16. Bank requiring more information or security in order to maintain credit facility
17. Putting off costs of maintenance on equipment which could cause an interruption to running your business
18. Your bank has suggested refinancing
19. Behind with Superannuation obligations for employees
Behind with insurances e.g. workers compensation, product and public liability
20. Accountants expressed concern over financial accounts prepared
21. Postponed meetings with accountants or provision of financial information due to discomfort with what might be proven once accounts completed
Most commentators are predicting a tough time next year, so my advice to all business owners is to take a serious look at your operations and prepare the business to be a ‘lean-mean fighting machine’. This should help you to weather the storm and come out the other end much stronger and wiser.
How to Make your Business a Lean Mean Fighting Machine
Customers
Watch out for credit-worthiness of customers. If you are a service based business, try to get up front deposits and progress payments. If you are a product based business check previous payment history of customers who make big purchases and negotiate better payment terms from them.
Stock
Closely monitor stock requirements. Check sales figures to see trends and allow for some decline in sales compared to previous periods. Don’t get sucked into buying stock because of discounts, unless you are absolutely certain you can turn stock over quickly. Think of stock or work-in-progress as cash piled up on the shelves! Work closely with good customers to predict their short and long term requirements.
Accounts Receivables
· Put someone in charge of Accounts Receivables and give them a system to work with. Give them targets to meet.
· Get regular reports from and meet weekly with the person who is doing your collections.
· Ensure your customers know what your 'Terms-of-business' are and that they are clearly stated on your invoices and statements.
· Provide as many ways as possible for customers to pay you.
· Make speedy follow up calls and make arrangements to pay off larger sums if they can’t be paid in whole immediately.
· Don’t hesitate to call in the debt collector.
· Let your customers know you're serious about payment from day one.
Accounts Payables
Get the maximum terms possible from suppliers and know what business you're doing with suppliers monthly to get better terms. Be prepared to shop around for alternatives.
Costs and Overheads
A small reduction in Costs can have as much impact on the bottom line as a big increase in sales, and may be easier to achieve. Shop around and look for more effective ways to achieve the results.
Don’t just ‘slash and burn’ when it comes to cost reduction. Get a copy of your last Profit & Loss statement and take the time go through each line of the P&L asking what can be cut and what can't. I know one small business with six staff that thought it couldn't run much leaner. It's costs were $60,000 a month. They found they could manage with one less staff member, cut phone costs and rent and a lot of little things. They knocked nearly $20k per month off their costs ... that put another $240k a year on their bottom line. Look closely at all your overheads and ask yourself 'How does this cost contribute to the profit?'. Don’t cut the wrong overheads e.g. marketing and good staff.
How to Keep the Cash Flowing in your Business
Margins
You must try to maintain margins as much as possible – not just through more sales but by good cost management. Competitors may falter which may give an opportunity to increase prices and allow you to maintain margins. Supply, quality and reliability are just as important to customers as price. You need to convince customers you will be around for the long term.
Accessing Credit
Banks are now more stringent about lending. You need to go to them with good information, such as 3 years historical reports, which are accurate, as well as 3 years forecast of profit and cashflow. Banks will need a lot of convincing you can repay the funds and will look at how you manage your own money as well as theirs.
Cashflow and Working Capital
Now more than ever you need to be able to ‘crystal ball gaze’. You need to be able to see where your cash will be in the future – 3, 6, 9 and 12 months out. You need to understand where your money is and keep it for longer in your bank account.
Where is the cash?
l Sitting on the shelves in stock
l With customers who haven’t paid yet
l With suppliers paid too quickly
l Jobs in progress that haven’t been invoiced yet.
l Excessive costs and overheads
l Assets or equipment that should have been leased or hired
If all of this sounds like too much to handle – get help. Help may seem costly, but not getting help may be more costly. The funds to pay for help can come from the efficiencies and savings created.
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