I’m writing this on a gloomy Friday morning. Storm Alex is hitting the UK and the weather forecast is looking thoroughly bleak for the weekend.
For some business owners, this will be a fair reflection of their mood right now. Whilst the summer months bought some hope, the recent rise in Covid-19 cases and subsequent government measures are already causing more disruption and hardship for businesses. What’s already been a tough year is showing no respite, and you’d be forgiven for feeling gloomy about things.
Of course, some businesses have thrived during 2020 and others have successfully repositioned their offering. There will be some who look at the next six months as an opportunity.
The more likely scenario, though, is you’re viewing this winter with survival as your first and foremost goal. Another scenario is that you’re questioning how much longer your business can go on?
So, today, we’re asking a tough question – should you persevere or give up?
Reaching the point of no return
Every year over 300,000 businesses fail or ‘die’ in the UK (Source: ONS). Common reasons for business failure include:
- Cash flow issues
- Bad debts
- Poor business planning
- Too much competition
- Lack of financing options
In 2020 the failure rate is likely to be much higher, although some forecasters believe the real jump will come in 2021 when government support is wound down, and debt repayments and tax bills hit (Brexit too).
The last point could be critical for those teetering on the brink at the moment. “Companies are taking these measures – tax deferment, CBILS – then they’re just sitting there, they aren’t cutting their overheads,” says Chris Conway of Multiply Accounting. “They’re hoping that things will just return to normal. I imagine a lot of people will end up paying their salaries with the income they bring in and will then go bust. I’ve already had some very difficult conversations with clients that will struggle to pay their VAT next year.”
‘Going bust’ – i.e. running out of money – is the obvious end point for a struggling business. In that scenario, your options will be limited – although, you can still struggle on and hope to turn a corner.
However, others may decide that their personal sacrifice is as much a determining factor for calling it a day. The stress and volatility of running a business is not for everyone. Some business owners simply decide they’ve had enough of living on the edge.
A big consideration, of course, is your staff. If you do have employees on your payroll, it’s not just your livelihood that will be affected. In these circumstances, the idea of giving up may sit uncomfortably.
Addressing your situation
If your financial situation is dire, the absolute number one step is to seek advice from a qualified professional says Richard Tonks, an Insolvency & Restructuring Partner for Azets.
“The prospect can feel daunting; talking to a stranger about your business and problems there will be a temptation to think that “any question I ask is stupid” or “I might have done something wrong” or “how much will all this cost”.”
Ultimately, though, this is where licensed professionals prove their worth.
“An experienced advisor will empathise and remind you that you are not alone. Many businesses struggle and if you act swiftly and follow advice (from qualified individuals), it might be that your company is not beyond the point of no return and could well be saved. But even if it is too late (to save the company), a failed company is not the end of the world and taking/following advice at the right time should not prevent you from earning a living, or, sleeping easier at night.”
There are usually three key issues that a business can address in order to save it, says Tamsyn Jefferson-Harvey of Seed Accounting Solutions. “Sales are too low (either price and/or number of sales), costs are too high (both overheads and direct expenses), and margins are not correct.”
However, you can only identify and fix issues if you have an accurate picture of your financial health. “Make sure all your finances are in order, so you have full visibility of your financial situation,” Tamysn adds. “Having accurate and up-to-date data is absolutely key to understanding the full picture.”
If the situation is retrievable, how you approach your rescue plan will depend on your legal structure. We’ve got a couple of articles with more detail on the different options available to you:
- How do I rescue my business as a sole-trader or partnership?
- How do I rescue my business as a limited company?
Calling it a day
Insolvency is the point at which a business is unable to pay its debts. At this point, you’ll be faced with some tough decisions. In some cases, a business owner may determine it is ‘reasonable’ to continue in the belief the financial situation will improve and the position of the company’s creditor will not worsen.
This decision will be scrutinised later down the line, however, if it is deemed the owner acted unreasonably. Assessing your balance sheet position and forecasting is key, stresses Richard Tonks.
“To give a crude example; if a company had assets of £100k and liabilities of £400k, it would be deemed to be insolvent as it has more liabilities than assets. If the directors then prepared forecasts that said the company could lose £100k next year, there would be a clear argument that it would not be reasonable to continue (as to do so would make the position worse).
“However, if a company had assets of £100k and liabilities of £200k (and so still insolvent but by a lesser sum), and, the directors produced robust financial forecasts which said that the company might make £200k profit next year, providing the forecasts were reasonable (and supported by evidence), there is a clear argument that continuing will make the overall position better (for both creditors and shareholders).”
Should I persevere or give up?
It is not a failure to think about your exit strategy. If you can see a way out that enables you to sell your business or shut down with your finances intact, this might be the best approach for the sake of your physical and mental health.
Whilst there are plenty of notable businesses who’ve come back from the brink, there are those who’ve ploughed on beyond the point of no return. Ultimately, a bad situation can be made a lot worse if you fail to address the issue head on. Speaking to an accountant and licensed insolvency practitioners will help you to see the full scope of options. “It’s much easier to save a business (or at least part of a business) if strategy and planning are put in place early on,” says Dale Mitchell of Azets. “As an accountant and advisor, it is always frustrating and heart breaking when someone reaches out too late and you think ‘if only they had spoken to us earlier’.”
Turning it around can be done but you’ll need to modify how you think and operate. Every penny needs to be accounted for. As Richard Tonks explains “actions and transactions that were deemed perfectly valid yesterday, may now be viewed differently today. “
To help you survive through this difficult winter and beyond, cash flow forecasting needs to be central to your planning.
“The best forecasting software will also calculate predicted revenue, expenditure, tax commitments, profit and so on,” says Hannah Dawson, founder of Futrli. “It is absolutely something that every business owner should be able to use to make sure they are making the best decisions for their business. You don’t need to be a finance wiz, an accountant or a bookkeeper.”
Here’s Hannah talking about why your business can benefit from Futrli’s prediction software.
Informi readers can sign up for free and get the first three months of the paid version ‘Flow’ for free.
1. Go to Futrli
2. Register for free
3. “Upgrade to Pro” and use the code COVID_INFORMI at the checkout.