There are many warning signs that indicate a business has problems. These come from a variety of sources and include changes in behaviour from:
- Within the business; its staff and management;
- Her Majesty’s Revenue and Customs (HMRC); and
- The internal focus of the business owner or the Company Board.
Business owners need to make sure they do not ignore these signs and that they take action to rectify matters or seek professional help immediately. The biggest obstacle they often have to overcome is their own self-denial and a feeling that the problems are temporary and if only the business can navigate the next hurdle successfully, everything will be as it should be. The following
warnings should be heeded.
Loss of clients.
Clients who have a good history of trading with the company and suddenly stop can be indicative of others seeing the true situation before the business owners. This can be hugely problematic, particularly if a customer has been a major source of revenue. Alarm bells should also ring even if the company was to lose smaller, troublesome clients who take out of the business more than they bring to the table. Whether in trouble or not, a business should do all it can to find out why clients, which have been a source of repeat business, stop trading with them. There are also those clients who enter the business gateway, look around and leave without buying. Businesses also need to make sure that this doesn’t happen and that they put together a package for them, together with aftercare, which they can’t refuse.
Loss of key personnel.
Losing staff, particularly to a competitor, can be a difficult pill to swallow. Perhaps they have chosen to leave because they have progressed as far as they are able within the company and are now looking for a new challenge. Alternatively, aware of what is going on within the company, particularly if there are rumours circulating that go unchallenged, they may be the first of the rats to desert the sinking ship. A company should do all it can to find out why key employees are choosing to leave.
Not engaging in profitable activity.
A business heading for trouble is unlikely to be operating at full strength; orders may not be coming in so there is no money with which to buy supplies, fittings, etc. In these situations employees will find things to occupy themselves and appear to be very busy. However, the activities they are engaged in may not be generating profits. Business owners must be very aware of their cost against profit equation to the extent that they know each day whether they have returned a profit or a loss. Leaders must make sure that employees stay focused on doing those tasks that will generate orders and increase sales.
Lowering the price of the product or service.
A business faced with problems may see lowering the price of the product or service as a way to stimulate the business. Business owners should resist this as the strong likelihood is that whatever the new price is, another company will undercut it. Rather than cutting prices a business should look at cost-effective ways it can add value to its product so that clients believe they are getting an excellent bargain for their money.
Encouraging feedback should be part of a modern business’s standard process. Listening to feedback from staff, management, customers, clients, and suppliers can give an early indication that trouble is looming, enabling early mitigation of the problem.
All of the above can signal problems. In addition there are some very obvious signs.
It is ironic that when a business is doing well it seem to have access to an unlimited amount of funding whilst, when it is struggling, the opposite is often true. Behaviours that reveal that the company's bankers have sensed something is wrong and has lost confidence include:
- Refusing to increase overdrafts; which are usually at the limit in any case;
- An increase in requests for information and more detailed monitoring by the bank of the business’s position.
- Cheques are returned unpaid;
- Applications to the Small Firms Loan Guarantee Scheme are refused;
- Requests are made by the bank to directors for new or revised personal guarantees on lending; and
- The bank looks for security in the form of company assets.
A business in trouble may experience difficulty in furnishing Companies House with the account information required on time, or at all. This is a clear sign of difficulties. Furthermore matters will be made worse as penalties for late submission will be levied.
Problems with creditors can cause major headaches for businesses. A business that is unable to pay its creditors in full and on time sends out a strong message. This could lead to insolvency or
a winding up petition. Furthermore, if a business can’t pay its debts, it is unlikely to have money for supplies to manufacture it's product and therefore income falls further. It will also find that other avenues to new credit are closed. Business owners should take immediate action to deal with the following:
- Inability to meet credit commitments;
- The business is juggling remaining available credit and cash flow, using money from one source to pay an outstanding bill in another area. This just creates a problem in the area the money has come from;
- The amount of time spent dealing with creditors is increasing as is the daily mail drop of creditor demands;
- Bailiffs, debt collectors or sheriffs have visited the company premises;
- HMRC is vociferously pursuing the company for PAYE and VAT arrears; and
- Suppliers are unable to obtain Trade Insurance. This may mean they stop supplying the business which would effectively be the final nail in the coffin (this was what happened to Woolworth’s in 2008).
Business problems can reverberate across the shop floor or through an office very quickly. Indications from staff that things are looking bleak for them include:
- High staff turnover, and with it loss of experience;
- An increase in internal strife and factionalism;
- Increases in sick absence and absenteeism;
- A feeling among staff that nothing is going right; and
- Low morale.
If, as a business owner or company director, you no longer look forward to going to work in your business then something is clearly wrong. Other signs include:
- A reluctance or failure to open post;
- Instructing secretaries not to put calls through to you, particularly if they are from creditors or irate suppliers who want paying;
- You haven’t paid yourself for sometime and are living off personal
- You are not sleeping; and
- Your mood is affecting your personal relationships.
It is crucial that as soon as problems emerge you deal with them. When a business goes into liquidation the behaviour of directors is examined and if they have behaved improperly by ignoring signs of business failure they can be disqualified from acting as a director in future, or even face more severe penalties
such as personal liability for debts.