When Recovery happens – things you may wish to consider.
The seeds for failure can often be planted in good times. As such it may seem peculiar to think about business failure at a time of recovery and growth. Businesses that have struggled to make sales but have survived can find themselves inundated with orders. This can lead to a loss of financial discipline and liquidity issues as cash being drawn out of the business to fulfil orders well before payment is received.
Foundations and Building Blocks
Accurate and up-to-date management information (MI) is always important to establish at launch when the founders identify key success metrics. The reason for this is simple, to know a business is succeeding, those running it must know the vital signs that allow them to monitor its health. For some that means daily MI, for others weekly, while for others monthly will be enough. Increasingly, monitoring is done in real time, with MI presented in a ‘dashboard’ that allows business owners to keep an eye on the essentials. Key factors to watch out for is cash flow, along with cash in the bank. Other factors include sales and purchase ledgers.
A common mistake is over-trading. This is when a business takes orders without considering its cash flow. If suppliers demand money on terms worse than customers pay on, or there are delays being paid, each order can lead to a worse short-term position. The same can happen if currency fluctuations catch a business out and it loses money on each sale. If protections and measures are not taken against this, a business will get into difficulties while seeming to thrive.
In these cases the gap must be plugged, through credit, quicker payment, or another type of financial injection, such as debt or investment.
Early Signs
It is entirely possible for a business to trade, apparently successfully, while things go wrong under the surface.
Early signs of a problem can include:
· a lower-than-expected bank balance
· use or increased use of an overdraft.
· lower profit margins
These problems can indicate costs of production or overheads rising faster than revenues which can be managed for a short time if the business is aware it is happening. If inflation forces up costs, or exchange rates move to make components more expensive, action might be needed to maintain margins. Businesses with lots of debt need to watch interest rates.
Even owners without a grasp of key metrics often get a sense that things are not going well before they see flaws in the business. The best advice is to ask tough questions and act early. Liquidity or cash flow problems rarely fix themselves. Finding the cause is vital, as is understanding differences between a symptom and root cause. This is one way Lucas Ross – Business Rescue, Recovery & Insolvency can help.
We have an extensive background in working with worried Business Owners and Directors. We also work with trusted advisors who can often support all areas of Business Rescue and Recovery. Our testimonials speak for themselves. Call us today for a free, impartial chat – call 0330 128 9489 or email help@lucasross.co.uk
