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How to Avoid Business Failure

By September 24, 2013 No Comments
How to Avoid Business Failure

You don’t need a crystal ball to avoid business failure – but keeping a watchful eye on customers and suppliers helps.

Steps to avoid business failureThe last six years have been a choppy ride for many small business owners, as the UK economy has pitched and rolled from one crisis to the next. But, in recent months, there has been a glimmer of hope for those running Britain’s smaller firms. Rates of company insolvency fell overall for three months on the trot earlier this summer, with micro businesses experiencing a particularly significant drop in business failures.

These surprising findings from credit monitoring group Experian show that companies with between zero and two employees – more than 1.5 million of them in the UK – saw insolvencies shrink from 0.07 per cent in July 2012 to 0.06 per cent in July 2013. But, it’s not all good news. The same research revealed that the biggest corporate beasts, those with more than 500 employees, have experienced a marked increase in insolvencies – up to 0.15 per cent in July this year, almost double the equivalent figure for 2012.

When big companies fall, many smaller businesses further down the supply chain are inevitably crushed in their wake. R3, the association of business recovery professionals, calculates that more than one in four corporate insolvencies is caused by another company failing. So, what can small firms do to avoid tumbling down in this domino effect?

Vigilance must be your watchword, with monitoring systems in place to spot the first signs that the financial status of customers and suppliers may not be entirely healthy. Both groups matter – if your customers go down, you won’t get paid. And a key supplier failing could cut off a vital source of goods that allows your business to operate. Much of it is common sense or plain, gut-based intuition. If a supplier starts to miss deliveries, disruptions occur to their usual service, or they seek to reduce payment terms, then alarm bells should start to ring. Listen to them and determine whether your concerns are justified.

If you do get wind that a company you deal with may be in distress, ask yourself a few questions:

  • Do you know if they’ve sought refinancing? It’s one thing to unlock cash flow to expand an operation or pursue an opportunity, but another to take on additional lines of finance in a desperate attempt to keep the ship afloat. This is where being plugged into industry networks may prove useful to get up-to-date background and the latest word on the street.
  • Is there any suggestion of cost cutting going on within the business? This could include any number of things, such as redundancies or a move to smaller working premises. And even if businesses are pulling in their horns, are these genuine signs of distress or just examples of good and decisive management in straitened times?

Keep a close eye on the people you speak to within a company. If they sit beneath the top tier of management and suddenly have less authority than was previously the case, it could be an indication that supervision of financial processes is being ramped up as cash flow tightens. And if those you engage with disappear altogether, be on your guard. In such circumstances, it could be quite legitimate to ask the top brass outright what’s going on.

Beyond developing a second sense for potential trouble brewing, there are some practical things that you can do to shore up the defences of your company.

  • Check the terms and conditions of contractual arrangements, paying particular attention to termination clauses, ensuring that you can get out of a contract if things do begin to turn sour.
  • Also, scrutinise any retention of titles clauses in your contracts. These ensure that where goods are supplied on credit the seller can effectively repossess the items if the buyer goes bankrupt. However, these areas of law are complex, so it may be wise to take some professional advice.

R3 estimates that there are more than 200,000 businesses currently negotiating with creditors or struggling to pay their debts when they fall due. These companies are of particular concern since experts consider the inability to pay debts when they’re owing to be a technical definition of insolvency. In other words, these firms may not yet be obviously bust, but they could be on the brink. They can also be hard to spot since a prolonged period of low interest rates and Government support for businesses have kept some of these sick patients alive longer than might otherwise have been the case.

Whether it’s a customer or a supplier, what matters is remaining alert to even small changes in the circumstances and behaviour of the businesses upon which your company depends. If you see clouds on the horizon, act swiftly and decisively to mitigate the risks to your own operation. Don’t naively wait things out only to find yourself caught in the eye of the storm. Once you’re at that stage, your business risks not making it out in one piece.

Image courtesy of pakorn /

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