We often hear from directors and company owners who are concerned about their company failing.

Running a business is inherently risky and requires a lot of hard work and effort. There are many external factors, beyond your control, that can determine the success or failure of your business.

Assessing the Situation The first step is to assess your company’s financial status. Is it already insolvent or approaching insolvency? Use these tests to check for insolvency.

Common Causes of Business Failure Some of the most common reasons for business failure include:

• Poor financial management
• Extending too much credit and struggling to collect on outstanding invoices
• Growing too quickly beyond what is sustainable and manageable
• Unexpected costs
• Sudden changes in the business environment
• Ineffective marketing
• Products becoming obsolete
• Bad luck
• Theft and fraud (often linked to poor financial management)

Warning Signs to Look Out For As a director, recognising the signs of a failing business can be challenging. Here are some key indicators:

• Constantly feeling under pressure
• Escalating risks for you and your business
• The business becoming insolvent (refer to our insolvency signs)
• Declining customer enquiries
• A loss of enthusiasm or ‘buzz’ about your business
• Ineffective marketing efforts
• Bills not being paid on time
• High staff turnover rate
• Lack of new ideas for products and/or policies

How Can I Turn It Around? Increasing sales suddenly is challenging, so the first action any director should take is to cut costs.

• Personally approve purchases to ensure they are necessary and fairly priced.
• Scrutinise employee expense claims to ensure they are for legitimate business purposes.
• Manage cash flow meticulously as “cash is king” for reviving profits.
• Request pricing reviews and better deals from suppliers, including extended payment terms.
• Request a rent break or switch to monthly payments instead of quarterly to improve cash flow. Rent arrears might be acceptable as most landlords prefer to retain their tenants.
• For larger businesses, consider closing non-performing premises. If you own property, a sale and leaseback could release cash.
• Arrange to pay your accountants monthly to spread the cost.
• Manage cash flow daily, possibly with the help of a bookkeeper.
• Seek advice from a trusted friend or mentor who can provide a sanity check and offer cost-cutting suggestions.
• Consider using your own car and returning the company car to reduce personal tax.
• Sell assets for cash, ensuring they are not leased. Compare prices before selling.
• Use factoring or invoice discounting companies to draw down funds weekly to save costs.
• Look for less expensive finance options, though this can be difficult and may require up-to-date management accounts.
• Eliminate pointless meetings where no decisions are made.
• Communicate with employees throughout the business. They may have valuable insights into customer issues, operational challenges, and supply problems.

To discuss the issues raised in this article in more detail, please contact a member of our Restructuring & Insolvency team.