In these challenging economic times we have seen many businesses going into administration, often suddenly and without warning; companies that many of us are shocked to see in such a position.
So what are the warning signs that your business may be in danger, or sailing very close to the edge?
If you recognise too many of the following signs then it is likely that your business is probably under pressure and at risk.
•Cash flow always tight so paying creditors is difficult.
•Inefficient production - can’t get stock because you can’t pay creditors on time.
•You can't get stock on time because you miss deadlines for payment of supplier accounts.
•You cannot get new credit.
•You cannot extend existing credit.
•The company’s creditor days are growing.
•You don't meet agreed payment terms.
•You have lots of red warning letters.
•You have had lots of 7-day letters, legal actions and court papers to defend.
•You are using lots of suppliers and spreading credit around.
•You are always fighting creditor fires and having to handle creditors’ calls every day.
•Your suppliers can’t obtain trade insurance against your company.
•Your overdraft is always at the limit.
•Your bank has returned cheques.
•Your bank has refused to increase your overdraft.
•Your bank refuses to provide a Loan.
•Your bank has asked for facilities to be reduced.
•Your bank wants to introduce investigating accountants.
•Your bank asks for increased security.
•Your bank wants personal guarantees.
PAYE & National Insurance
•You are not paying deductions on the 19th of the month following.
•You have not filed monthly returns or paid the tax deducted.
•You have had penalties.
•You have entered into “Time to Pay” deals with the Revenue.
•You have not managed to keep up with these deals.
•Taxes and other social security liability on audited accounts seem to be high.
•Tax Collector pressing.
•Not filing returns or paying tax on time.
•Doing deals over time with the local VAT office.
•Cannot keep up with deals.
•Cashflow says you can repay far more than profits made.
•They don’t pay on time.
•You don’t know what your total debtors are.
•Debtor days are over 90 days.
•Your company has concentration in 1 or 2 major customers (debtors).
•Your accounts department only invoices periodically.
•You do not have a dedicated debtor collection function.
Invoice Discounting & Factoring Companies
•I don't know how much they owe me.
•I don't know how much the company owes the factor.
•Your factoring company is reducing your advance.
•They don’t seem to understand my business.
•We can never get enough cash advance against invoices.
•They are advancing 75% against my invoices but disallowing lots of invoices.
•They are too expensive.
•They claw money back from me after the debtor has not paid in less than 90 days.
•You have not filed the company’s accounts on time at Companies House because the results show a sizeable loss.
•You have not filed the company’s annual return at Companies House
Management Warning Signs
•Fire-fighting - you never get your work done;
•Lack of information or wrong information;
•Concentrating on non essential issue;
•Senior people seem paralysed into inaction.
•Are you "compartmentalising" problems - in other words do you deal with one creditor problem and ignore others.
•You don’t have a business plan.
•You don’t have regular management meetings.
•You don’t have board meetings.
•Directors are taking big salaries and expenses.
•You ignore advice of professional advisors.
The Management Team don’t know: -
•Gross Profit - accurately.
•Costs - accurately.
•Sales per month / per annum.
•Enquiries quoted for.
•Where 80% of work comes from.
•Where 80% of profit comes from.
•What your accounts say.
•Your market – what are your competitors, products and threats.
•The Key Performance Indicators of the business:
•How many units of your product you make per day.
•At what cost.
•How many units you need to make to break-even.
•How many enquiries do you need.
•How many enquiries do you convert into sales.
•How many people it takes to make this product.
•What is your sales performance compared to last year, last month, budget.
•What are your costs increases/decreases year on year.
•How many new customers you have gained this year.
•How many customers you have lost this year.
•You don't produce monthly management accounts.
•Computerised accounts package shows negative balances in liabilities.
•You have a computer generated profit and loss but a handwritten balance sheet.
•GP constantly overstated - you just do not understand why no profits are made from such good gross margins.
•Constant returns, faults and disputes with debtors.
•High staff and management turnover.
•Internal political issues causing difficulties.
•Your team always seems demoralised.
•Always refinancing assets. No money to pay deposits.
•The next big sale/contract/debtor payment will sort the problem out!
•You have introduced a number of new financial products to keep going.
•You have borrowed money against your home to fund the business.
•You are not taking money out of the business to live.
•You have used your own money to pay wages pay bills.
If any of these points sounds familiar, seek professional advice now. The biggest mistake that many businesses make is to think that they can solve the problems themselves (or worst still, go into denial that any issues exist)! By the time they admit to needing assistance with their problems it is usually too late.
In getting professional advice at an early stage, you stand the greatest chance of restructuring and/or refinancing the business and surviving, stabilising, consolidating and eventually growing the business.
Or better still, bring in a high quality Interim Finance Director now to run the rule over your business and ensure that your working capital cycle is running as efficiently as it possibly can and that effective procedures and controls are in place to give your Company a solid foundation for growth.