Unsurprisingly, the most common question we get asked here at McAlister & Co is why businesses become insolvent. Although we could give an extremely long-winded answer, more often than not it is usually very simple. No, it’s not that they have poor service or a bad product, but actually because directors often believe that business decisions have less risk associated with them than if they were put into a different environment.
But did you know that building a business is like building a house? Yes, really! And we often find that looking at things from the perspective of running a household can help to make more financially sound decisions. Here’s how...
Running your business as if it were your home
An analogy we like to use is to imagine the same decision in a household context. For example, “Can you afford that new piece of machinery on finance?” becomes “Can you afford to put a ride-on lawnmower on a credit card?”. Both could well mean an increase in output after the initial purchase, but are they affordable, and will they continue to be economical in the long term?
It seems a simple mistake to make but ask yourself if you can really afford it - and give yourself some serious time to think about it. If you have to think about the answer, even for a split second, then go and do some more homework on it.
This extends to wider issues as well. In fact, one of the biggest mistakes we see is directors committing to contracts that are just too big for their company as a whole. That gleaming contract that could get the company to start competing with the big boys: was it ever going to be completed to a high standard? Or were you just setting yourself up for a fall?
Let’s put it in a household context: would you promise to pick the kids up from school, get home from work, do the washing, hoovering and shopping all between 4 and 5pm and still expect to succeed? No matter what was promised, if you can’t meet an order, don’t say you can do it.
These issues are becoming increasingly common in recent months, especially as businesses begin to recover from the Covid-19 pandemic. Yes, you want to get back up and running again as soon as possible but remember to not be lured by fool’s gold. Instead, take a step back and look at things from an objective perspective.
With that in mind, if you are currently finding things tough financially, here are some top tips on building a business like building a house to help you turn things around before it’s too late…
1. Cut costs
One of the most important things to do if you are facing financial difficulty is cut costs where possible. Just as you would cook at home rather than eating out or take your coffee in a thermos rather than popping to Starbucks every day, cutting costs is important in business too.
Before you get started, make sure you have a clear picture of your current financial situation: start by reviewing your accounts to see who owes you how much and audit your stock to see if any could be freed up to bring in more funds. You should also make sure you carefully review your balance sheets to see what efficiencies could be made.
For example, what expenses aren’t essential? Could you move your premises to a cheaper location? By getting to grips with the bigger picture, you can then zone in on specific problem areas and begin to cut costs.
2. Take control of your cash flow
Once you’ve got a good grip on your finances, you need to create a cash flow forecast - just as you would a monthly or weekly budget for your household. Prevention is better than cure - and there’s no better way to solve a cash flow problem than to prevent there being a problem in the first place.
By creating a cash flow forecast, you can estimate the amount of money you expect to flow in and out of your business and when, so you can know in advance how much cash your business will need in the coming months.
By planning ahead, you can start making the necessary precautions now for any tough times ahead to make sure there’s no negative impact on your business - a bit like you might save money now to cover the cost of Christmas.
3. Create a recovery plan
If your business is currently struggling financially but you think it has a viable future, you should contact a licensed insolvency practitioner to help you create a business recovery plan. Your insolvency practitioner will look at every aspect of your business, assessing any weaknesses and the potential for change, whilst also taking advantage of insolvency laws to give you the best possible chance to recover.
Your plan should accurately reflect the standing of the company as well as identifying the most important areas of your business, such as what is needed to keep your company running, your basic operating budget, the minimum financing needed, and an action plan should disaster strike.
A business recovery plan is essentially a chance to start again, change management strategies, approach problems from a new angle, or just generally refresh business and renew interest.
4. Consider a company voluntary arrangement
In situations where more serious financial problems exist that jeopardise the future of your company, a company voluntary arrangement is a powerful tool that enables you to ring-fence your business to give you some breathing space whilst you find a solution.
A CVA is a formal arrangement between a company and its creditors highlighting that although you can’t pay your debts at present, you will be able to in the future. It works by enabling you to avoid liquidation and instead focus on paying your creditors as much as you can afford out of your future profits.
With a CVA, you pay towards your business debts for an agreed period - and once that period is completed, your remaining debts will be written off. It is not a panacea for your company - rather, it is a powerful framework for change and protection that needs a lot of hard work and dedication.
Don’t delay - act now to turn things around
See - we told you that building a business is like building a house! If your business is facing financial difficulty, it’s essential to act quickly. Financial difficulty doesn’t always have to mean the end of your business - and by working with licensed insolvency practitioners, you can find the best outcome for your business as quickly as possible.
At McAlister & Co, we are business rescue experts - so if you find yourself in financial difficulty, contact our team today to discuss your next steps.