How to keep your small business afloat
Running a small business is never easy. Ferocious competition, demanding customers and financial pressures will always cause headaches, while uncertainty created by Britain’s decision to leave the European Union is an added complication.
More than 14,000 firms in England and Wales went bust during 2015, according to The Insolvency Service, and although the dire warnings of what would happen post-Brexit have so far failed to materialise, management teams are understandably nervous.
So how can you improve your chances of thriving in this environment? What are the best ways to develop your enterprise and avoid problems? We have consulted the experts and put together a guide to protect your business.
Know your business
According to Emma Jones, founder of business support group Enterprise Nation, the basic ingredients required are very straightforward: earn more than you spend and ensure earnings are coming in at a pace that covers your costs.
“This all has to be delivered by a committed, talented team, with the founders surrounding themselves with support,” she says. “If an entrepreneur can get these basics right, then the world is their trading oyster.”
However, the fact so many businesses fail illustrates this isn’t easy. “The most common mistakes are insufficient sales, spending too much, or hiring someone who is not right for the business,” she adds. “All these can be rectified if you spot them and act early enough.”
The best way to gauge how the business is performing is putting together a 13-week forecast of expected outgoings and receipts. Not only will this give you a real insight into how you are doing, it will also identify any longer-term problems.
Keep the cash flowing
A key ingredient will be cash flow. This is the lifeblood of any business, so it must be your top priority. You may have the best product and services, but if you run out of money you’ll be on the fast track to bankruptcy.
Cash flow problems are easy to spot. Are you forced to dip into your overdraft every month because your customers’ bills are outstanding? Have you a long list of debtors and no real idea when – or even if – you will see any money?
Remember to send your invoices out on time and consider phoning your customers before the end of the agreed credit term to confirm they will make the payment. Keeping in regular contact with clients will increase your chances of balancing the books.
You also need to monitor clients carefully. The first sign of trouble in a business is usually when it stops paying its bills on time. If one of your customers does this, be wary of allowing it any more credit in case it defaults.
For the most reluctant payers you can always get tough by using government legislation that enables you to charge interest of 8%, plus the Bank of England base rate (0.25% at the time of writing), for business-to-business transactions.
Watch the pennies
Carefully monitor your expenditure. Every company pays out for something that is a waste of money. This might not matter so much in buoyant periods, but every penny counts when times are tough – or you’re trying to raise capital for a new project.
Effective ways to reduce expenses include asking employees to travel second class rather than first, keeping in contact with customers by phone instead of in person, and shopping around for the best energy deals.
Avoid buying more stock than needed as this is a drain on resources; don’t be tempted to slash prices without good reason; and see if you can renegotiate more favourable terms with suppliers. Although they may seem small changes, they can make a real difference.
Regardless of the backdrop, lean, focused businesses will be in a far better position to grow than stodgy, flabby firms that constantly haemorrhage cash and spend every year desperately trying to make ends meet.
Look after your clients
Focus on selling more to existing customers, as this is cheaper than sourcing new ones. Concentrate on providing outstanding customer service by exceeding their expectations and try to offer an efficient service, fast delivery and flexible payment terms.
Ask current – and potential – clients how you can improve your offering. For example, is there a type of product they are looking to buy? Having an ongoing dialogue with customers means you will be more aware of their changing requirements.
Similarly, be aware of trends. Just because your business is turning over a substantial sum today doesn’t mean the future is guaranteed. We are living in fast-moving world in which technological developments can change the outlook virtually overnight.
Plan and develop
One of the biggest risks facing businesses is missing out on the opportunities that are available to them in the global marketplace, according to Andrew Burn, a partner at KPMG and an expert in turning around companies.
Corporate life may have improved greatly since the dark days of the financial crisis eight years ago, when everyone was cutting back on spending and the banks were reticent to lend, but that doesn’t mean it’s any easier to make a decent living.
“There are as many risks facing businesses now as there were during the recession – but just for different reasons,” he explains. “Today the danger is not maximising their resources, so they are unable to take advantage of the environment.”
To succeed, businesses need to ensure their finances are in order – such as the aforementioned getting paid on time – not being overly reliant on one customer, and having an up-to-date business strategy that can guide them over the next few years.
In addition, Mr Burns points out that banks will generally be supportive of development plans and suggests companies need to know how much money they can borrow. “They want to be in the best possible position to expand into new markets,” he adds.
While it can be tempting to cut back on advertising and promotion budgets when things are tougher, this could be a mistake. You should actually increase your marketing and tell potential customers why they should be using you.
There are an increasing number of ways in which to do this on social media – and at a fraction of the price advertising campaigns would have cost a few years ago. Make sure you are using opportunities on Facebook, Twitter, Instagram and Pinterest.
Seize new opportunities
So how can you develop the business? Essentially, there are three main options for growth:
- Increasing your market share;
- diversifying into other areas; and
- expanding through merger and acquisition activity, joint ventures or partnership arrangements.
Digging down deeper, these areas will include diversifying into totally unrelated ventures, looking into the possibility of exporting your products into new markets and expanding the range of services that you are offering to existing customers.
Choosing which route is best requires a thorough analysis of your business and how it is performing. The timing of any expansion will be critical and you will also need to consider factors such as whether the infrastructure of your business can cope with the extra demand.
Then there are external factors. Brexit is a prime example. Although nothing will change immediately as trade agreements are in place with all EU states, Miss Jones believes it’s an opportune time for businesses to start looking further afield. “Countries such as the US, China and Australia are open for business and in search of British goods,” she says.
Access the right funding
According to Stuart Deacon, partner at accountancy and business advisory firm BDO, one of the biggest concerns for business leaders is accessing the right capital to fund the development of their company.
“A common mistake is funding growth or capital projects with the wrong type of capital, such as a short-term overdraft or an expensive loan,” he says. “Combined with volatility in business performance, this can quickly create stress and a new money requirement.”
He suggests the best advice is to be prepared and consider several options. “There is a range of potential funding outcomes, ranging from self-funding, to additional bank debt, to new equity,” he explains.
It is also worth checking what help you may be entitled to from the government, which can be accessed via Gov.uk/business-finance-support-finder.
Despite the global opportunities available to businesses, thousands are likely to go bust again this year. Those under pressure will generally fall into four categories, depending on cash flow, debts and prospects: stable; at risk; stressed; and distressed.
This is the spectrum between being solvent and insolvent. You can usually get out of being stressed, but if you’re distressed you’re up against the clock. Therefore, people need to know where they sit before deciding the order in which issues need to be tackled.
Owners of stressed businesses, for example, need to be in regular contact with their bank and major suppliers, ensure their tax and VAT bills are paid on time, and don’t exceed their agreed overdraft levels. If they don’t, they may be forced out of business.
The key is to take positive action as early as possible, insists Miss Jones. “If you see a cash-flow issue round the corner, seek advice now, in the form of speaking to an accountant, bank, or an adviser in the business,” she says. “If you don’t have an accountant, access a free consultation call via the Institute of Chartered Accountants for England and Wales Business Advice Service (Icaew.com/en/about-icaew/find-a-chartered-accountant/business-advice-service).” It offers its find-an-accountant service in Scotland and Northern Ireland too.
Becoming insolvent may be the ultimate nightmare scenario, but this can be avoided if you understand the financial position of your business, take action to tackle problems early and constantly look for ways to grow.
The crucial factor is a positive mindset, points out Miss Jones. “There are great opportunities for strong British businesses in selling to government, existing customers, and overseas – you have to be in the frame of mind to make the most of them.”
Prepare contingency plans
Regardless of whether your business is performing well or keeping one step ahead of the bailiffs, it makes sense to have contingency plans in place to cover everything from protecting your files if your office burns down, to coping with the loss of a key customer.
The main idea is to keep your options open. If your main supplier goes bust, for example, you need to know you can immediately swing over to a rival company and allow your business to continue uninterrupted.
The same applies to customers. If one of your clients accounts for most of your income, then you are in dangerous territory as if they can’t pay or use another supplier – this could put you into financial difficulty.
But what happens if you have cut your costs as much as possible, explored every conceivable way of expanding your customer base, and persuaded all your customers to pay what they owe, yet your firm’s financial problems still appear insurmountable?
The good news is there is plenty of help available, according to Mr Deacon. “It is never too late to ask for advice,” he says. “Advisers know how to navigate situations with lenders and can free up precious management time to run the business.”
If you don’t have enough assets to cover your debts when they are due, then your business is effectively insolvent. If so, you will need an insolvency practitioner. You can find one at Gov.uk/find-an-insolvency-practitioner.
Your survival options include seeing if an agreement can be reached with your creditors on either the amount owed or the time you have to pay. These voluntary arrangements can be set up for individuals (sole traders), partnerships or companies.
Your next step will depend on the structure of your business. Sole traders can end up going bankrupt, while the options for companies include administration (to try to rescue the business) and liquidation (when the assets are sold to pay creditors).
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.
Generally speaking, insolvency is to businesses what bankruptcy is to individuals. A company is insolvent if the value of its assets is less than the amount of its liabilities, or it is unable to pay its liabilities (loan payments) as they fall due. It’s an offence for an insolvent company to keep trading, so the main options available to an insolvent company are: voluntary liquidation, compulsory liquidation, administration or a company voluntary arrangement.