Being a business owner is, in itself, a risky business. You invest a great deal of your own time, utilise the skills you have gained over the years and inject your own (or others) cash into a vision or an idea in the determined hope that it will succeed. Starting up the business and getting it off its feet may at first blush be the hardest part, but keeping it afloat is often just as difficult.
All business owners need to take effective steps to prevent their business from getting into a state of distress. All businesses are different. You need to understand your own business, the market you operate in and the wider environment for warning signs. The following are some general indicators that every business owner should keep an eye on.
Cash flow is the pace at which money is coming into and leaving your business. Staying on top of your cash flow and adequately managing your credit control is at the core of a successful business. As the saying goes ‘cash is king’.
Once you integrate a good working system and become adept at projecting your business’ cash flow, you will have more scope to manipulate the direction of your business or indeed invest in building and/or developing your business. All businesses should ensure they have rigorous and documented procedures in place and this is properly communicated to their staff, especially those in the accounts team. The procedures should detail how you want your cash flow checked, recorded and reported back to you.
If you have problems with cash flow you need to consider why this might be the case. A review of the processes and procedures you implement within the business may assist you identify whether you may need to operate a more stringent billing procedure or chase your debtors harder for example. To be able to effectively do so you need to ensure you have properly drafted legal agreements and that you keep abreast of the terms of the same. It is important that you are fully aware of payment terms for all clients and suppliers alike.
Defaulting on Payments
If you begin to notice that you are missing due dates for payments or are delaying payments to creditors more and more frequently, this could be a sign that your business is in distress.
Not only does this create problems for you financially, but it could also result in suppliers being forced to cut ties with you. It is likely to damage to your reputation and you run the risk of falling foul of Insolvency laws. In some cases this can lead to prosecution or even face being disqualified as a director.
As a business owner, you are ultimately responsible for what money is going out of your business. If there is an insolvency event you will be the person having to explain the financial position of the company.
You should ensure that you have well-documented agreements with all your suppliers. This enables you to terminate the arrangements should something go wrong or, where permitted, you find a better alternative supplier. It is also wise to carry out contract reviews. This will enable you to forecast any potential risks which may arise and also to consider the consistency of all your supplier contracts.
Where possible try and align your outgoings with when you are going to be paid by your customers. If your payment terms with your customers are, for example, 30 days then try not to agree to pay suppliers or subcontractors in less.
A business will run more smoothly when all shareholders are generally on the same page and are in agreement with the direction they intend the business to go.
If you begin to find that your fellow shareholders are being disruptive or are challenging aspects of the business, this may be a sign that your business is in distress or in turn it may cause your business to go downhill. You can prevent this by ensuring that future shareholders who come on board agree with the principles and ethos of the business. If a shareholder or director has made loans to the business this should be properly recorded especially repayment terms.
If you find that your business may be disrupted, you can turn this around by ensuring that you evaluate the business and its structure (and continue to do so) to ensure it still works in terms of risk and markets.
It may well be that you might find yourself in a situation where you have to make staff redundant, restructure the business or cut ties with people. It is important that this is all done correctly to ensure your business is not exposed to an employment claim. A lengthy and expensive legal battle or having to pay damages to a disgruntled employee will hit most businesses hard, let alone those in financial difficulties.
Before terminating any employment, existing arrangement or altering the payment package of any staff it is important that you have specific legal advice to ensure that you do not expose yourself to a potential claim.
As a general starting point, all business owners should be proactive in the way they manage their business and its finances. Proper legal documentation should be in place to enable you to manage your relationships, be that with customers, staff, suppliers or your landlord.
Keep a close eye on your industry and the market generally. Ask yourself what steps need to be taken now to future proof your business and its finances. This may even be altering your business model, investing in technology or trying to raise investment.
It is important that you try to do what you can to try and avoid getting into a state of financial distress. However, this isn’t always possible. If you do find yourself starting to fall into financial decline whatever you do, do something. It is not a problem that should be ignored. Take advice from your accountant and lawyer on the steps you can take to protect you and your business. Also, do not be afraid to speak to an Insolvency Practitioner early, they should be able to advise you on the most appropriate steps for business recovery.
Karen Holden is the Managing Director & Founder of A City Law Firm who practise both commercial law and litigation, having been admitted to the roll in 2005. If you require further advice or assistance, please do not hesitate to contact firstname.lastname@example.org
A City Law Firm Limited is a leading entrepreneurial law firm in the city of London, with a dynamic and diverse team of lawyers. It was awarded most innovative law firm, London 2016 and Business Law firm 2017. They specialise in start-up business law, the tech industry, IP and investment