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Business survival
11 min read

Business survival: 11 signs of a failing business and how to turn it around

Plate-spinning as a business owner can often mean you miss some major red flags when it comes to the health of your business. There’s no doubt that you’re working your socks off – but if you don’t make time to see the wood for the trees on a regular basis, then you can quickly find yourself operating at a loss, and becoming one of the 20% of businesses which fail during their first year

What’s the state of business right now?

While 2020 saw the lowest number of business failures since 2016, this was due to the large number of government support measures that were announced in response to COVID-19. As measures have been phased out by the UK government, business failures have understandably increased. Between 2020 and 2021, the total business population decreased by 390,000 (6.5%), which is 23% higher than the number of business failures in the previous year. Research by trade credit insurer Atradius warns UK business failures will reach a level of 33% higher in 2022 than they were pre-pandemic – one of the highest rates in the world.

Establishing a successful business is a task in itself – but throw in unprecedented events including COVID-19, Brexit, the war in Ukraine, the energy crisis, the rising cost of living to name a few – and you’ve got challenges coming at you from every direction. So, how can we give small businesses the best chance of survival in this environment? It’s all about spotting the signs of failure as early as possible so you can do something about it!

Here are some of the red flags you need to keep an eye out for…

Worrying numbers in your financial statements

Your financial statement is your first port of call. It’s imperative that you understand the numbers behind your business, as they will steer your decisions that will protect it. If you don’t hail from a financial background, then working with an accountant is worth strong consideration. Accounting software will also keep your finances clear and organised, but again you need to understand how to interpret the data it presents. 

The below list might feel a bit overwhelming, especially if you’re strapped for time already! However it’s worth being aware of these crucial signs in your financial statements that could be indicating your business is starting to fail.

Regularly look at these numbers. The more you look, the quicker you’ll spot any problems that could be brewing. (Again, if you have an accountant in place, they have the experience and knowledge to spot these signs. It’s still important you have an understanding of what you’re looking out for, however, as ultimately the success of your business boils down to you!).

Here are five crucial things to look out for in your financial reports, courtesy of Tamsyn Jefferson-Harvey, Director of Seed Accounting Solutions: 

  • Sales data

    Your profit and loss account will show your sales data. Have you achieved what you expected? Are you growing? How does it compare to last year?

  • Profit margins

    You’ll also find your profit margins on your profit and loss account too. Is your gross profit enough to sustain your overheads? If it looks low, are you charging enough? Or is the cost of delivery simply too high? Your net profit – did you make a profit or a loss? If it was a loss, do you know what caused it? Low sales? High overheads? Incorrect pricing? If you made a profit, is it enough to cover the liabilities in your business?

  • Net assets

    Your net assets can be found on your balance sheet. If it’s a positive number, it means your business has enough assets to cover the liabilities. If this number is negative, you need to find out why.

  • Liquidity

    Liquidity can also be found on your balance sheet. Usually called the Current Ratio, it’s a way to identify how easy your cash situation can be turned around. This is your current assets (bank accounts, accounts receivable) divided by your current liabilities (accounts payable, credit cards, short-term finance etc). If this number is less than one, you could be in trouble. You ideally want to be aiming for a number above 2 as this would mean you have twice as much liquidity (in assets) than what you owe (in liabilities). That being said, if the number is too high, it would suggest inefficient management of assets – it’s worth speaking to an accountant for advice in this scenario.

  • Debt to equity ratio

    Your debt to equity ratio can also be found on your balance sheet. This is calculated by dividing your total liabilities by the shareholder equity. The lower the number the better – a high ratio suggests the business is funded mostly by debt. A lower number shows it is funded more by shareholders and is likely to be more sustainable. Debt is often required, especially in the early years, or in periods of growth and transition, however high debt puts the company at higher risk. It is important to fully understand why your ratio is the amount it is. If you know that you are in a period of rapid expansion, you would expect a higher number, however, it will generate more revenue in the future.

Dwindling profits? Don’t panic

How to turn it around: Don’t panic

If your financial statements are showing that your profits have taken a nosedive, it’s natural to want to panic and adopt a scattergun approach to fix the situation. But don’t! Instead, be proactive to stop the situation from gathering momentum.

  • Start with some detective work. Look back at customer behaviours and try to understand when the drop began and find out why by analysing the numbers. Have you made a recent investment that isn’t currently making any return? Or have you incurred any unnecessary expenses? Have you made fewer sales? Has the price of your stock increased? Have your bills gone up? Is there a new competitor on the scene? Have you received a bad review that’s impacting customer decisions? Is it ranking in your brand search results?
  • Create a strategy based on these findings, focused on spending less, selling more, and increasing your margins.
  • A strong focus on sales is imperative – other projects can wait. Don’t forget, it’s easier up-selling to existing customers than it is to obtain new ones.
  • Are there other streams of income that you haven’t considered yet? Revenue streams that are independent of each other can mean if one goes down, you have other sources of income to fall back on while you troubleshoot.
  • Revisit your Business Model Canvas – always be looking for ways to optimise and innovate.

It may seem like a big project but be reassured that the work you do now could prevent more sizable losses in the future.

Inflation costing you more to operate?

How to turn it around: Don’t be afraid to raise your prices (carefully)

Inflation is on the increase around the world, driven in large part by pent-up consumer demand after the pandemic and the Russian invasion of Ukraine. Food and energy prices are hitting record highs. Everything’s going up and for many small business owners, profit margins are already slim. Inflation in areas such as your stock can make a big difference to your bottom line. It doesn’t take much for margins to be wiped out for high-volume low-margin businesses.

Don’t be afraid to raise prices if your business is simply not sustainable without doing so. The last thing you want to do is burn through your savings to maintain a price that isn’t realistic. However, tread carefully during the process. Customers will understand your reasoning if you communicate to them in a coherent, approachable way. The last thing you want to do is spring new prices onto customers without giving them the context or any notice, otherwise, you risk losing them altogether.

Top tip: Set reminders to look at your margins once a month. Have any material costs shot up? Are there other more affordable options available, or will you need to start planning a new pricing structure?

You might be losing a key client

How to turn it around: Find out why and make a plan

It’s important to have a plan in place should you lose a key client, as the result can have a severe impact on your small business. How much does your business’s survival depend on this client? – Even if you don’t think you’ll be losing a client right now, this plan is still crucial to have in place.

Firstly, don’t always think the worst. It might not be anything to do with your levels of service, etc. It might be due to financial circumstances on their side. If it isn’t, begin with finding out why they’re considering leaving, or deciding to leave. Is there anything you can do to change their mind? While you might not be able to stop them from leaving, you can turn the experience into a valuable learning opportunity. Why are they leaving? How can you improve on this moving forward? Are you fully aware of what your clients value most when it comes to your service?

If your budget allows, work with an accountant to assess the impact of losing the client and get their professional advice on what to do next. This might include preparing regular cash flow statements to highlight your cash needs over the coming weeks, or drastically cutting costs back to ensure you can pay your bills on time. It might even mean looking for additional finance to help you quickly deal with any emergencies while helping you facilitate business growth for the future.

As well as cutting costs back, it’s also time to think about how you can replace the lost revenue. Can you cross-sell or up-sell to existing customers? Again, this strategy should be in place already so you can hit the ground running should you ever be in this position.

Your business success shouldn’t be entirely reliant on one or two key clients. It’s time to ramp up your marketing efforts to attract new customers. Try out some new techniques and channels, measure the results, and do more of what works! Increasing your client base will take the pressure off when you lose key clients.

Your financial statements are worrying you.

How to turn it around: Seek professional advice

Don’t be afraid to ask for help! If you’ve spotted something that’s worrying you, or you aren’t quite sure how to read some of your numbers, an accountant can offer insight and strategy that will really help your business. If you already have an accountant in place, get in touch with them to discuss concerns as soon as possible and start putting a plan in place to address them. Don’t ignore the problem – take action as soon as possible! Regularly reviewing your financial statements will ensure you spot any brewing issues before they snowball.

Constantly firefighting problems?

How to turn it around: Step back and start with a list

Little fires everywhere? Is constant extinguish-mode stopping you from focusing on business growth? It’s time to get to the root of these problems by making a list, then working out ways to tackle and resolve each one. Once addressed, you might find that the bigger problems you had were being created by a mix of these smaller ones!

Is your unique selling point no longer unique?

How to turn it around: It might not be as bad as you think…

While USPs have long been considered an important part of any new business structure, times have changed. USPs have been particularly important in the past to those with local competitors – points that are so unique to their business that no competitor can offer them. However, some will argue that it’s almost impossible for a business to be completely unique anymore. With modern technology enabling businesses to be worldwide, consumers can easily see what each offers and compare accordingly. It’s extremely likely that there’s a company out there that can offer more than you, which can be accessed online in seconds. That isn’t to say that new niches and audiences emerge, with startups specialising in these areas having USPs in place for a time, but competitors will soon start to appear. If what made your company unique initially is no longer the case, don’t worry! Focus on data insight to drive effective marketing and sales strategies to ensure you stay ahead of your competitors.

Not generating enough buzz around your brand?

How to turn it around: It’s time to up your marketing game

There are a number of analytical tools available out there to direct you to the most appropriate platforms to target your audience – whether it’s increased spend towards your pay-per-click (PPC) ads, increased activity on LinkedIn, increased budget for your Facebook ads, improved user experience on your website, having a stronger presence at industry events, sponsoring more local events… the list goes on!

If you aren’t hailing from a marketing background, consider working with a marketing specialist who can refine your strategy to encourage better results. If you’re looking to get your name out there, a PR specialist can also bring something to the table. It might be a case of paying for initial insight and strategy, for you / your team to run with longer term.

Top tip: Track everything! Google Analytics (GA) provides insight into who your site visitors are, and what they do when they arrive at your website. Marketers use GA to understand the effects of marketing campaigns, and how a site’s user experience impacts factors such as conversion and retention.

Sales are plummeting.

How to turn it around: Understand the problem/s before rushing to fix them

If plummeting sales and disappearing customers are becoming a pattern in your business, you need to make some changes – quickly! But before you can make effective changes, you need to understand why this is happening.

  • Are you targeting the right customer base?
  • Are your marketing objectives too narrow? Or too broad?
  • Are your marketing messages clear enough?
  • Is your pricing structure not quite hitting the mark?
  • Are you advertising in the wrong places?
  • Is your website not very user-friendly? Does it work well on a mobile device?
  • Is there a new competitor or technology solution that offers a better product / service, for less?
  • Is a bad review circulating social media, or appearing in your brand search results?
  • The list goes on!

As well as looking at your data, start asking customers for feedback. Is there anything they’re not happy about such as service, prices, quality of products? Can you encourage customers to stay loyal with a reward scheme? Can you attract new customers with an exclusive offer, which runs for a set time? Recommend-a-friend incentives can be an effective way to reward loyal customers while gaining new ones. Take a look at any advertisements you have running – what are their conversion rates? Are some performing better than others? Could you use these results to refine your advertising content, and reallocate some of your marketing budget to the better performing channels? Has Google released a new search algorithm update that’s penalising your website in search results, causing your traffic to drop? Can you be more active amongst your local community, industry, target audience?

The sooner you can work out why your sales are declining, the quicker you can take steps to address them effectively.

In conclusion: Systems and processes are crucial

As you can see, there are a number of red flags to look out for when running your business. This is by no means an exhaustive list, but it gives an indication of the type of warning signs that you could be missing during what’s undoubtedly a busy time for you. Having the right processes, systems and people in place that regularly track and flag possible areas for concern – from the very beginning – is extremely important. The earlier you can spot the signs, the quicker you can deal with them and potentially prevent catastrophic consequences.

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