8 min read

How to survive when a business gets into trouble

If something happens that could have serious cash flow implications, such as the Covid-19 (coronavirus) outbreak, what can you do to try to prevent it killing your business? 

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Why do small businesses get into financial difficulties?

About 336,000 businesses fail each year in the UK (source: ONS) and in most cases it’s because they run out of cash and can’t access enough finance to pay their bills and survive.

Some small businesses fail to control their costs. In other cases, their costs increase significantly beyond their control, for example, currency fluctuations can suddenly make buying from some overseas countries much more expensive. Major interest rates increases have at times also had a catastrophic effect on UK small businesses.

What are the other common scenarios?

About 336,000 businesses fail each year in the UK (source: ONS) and in most cases it’s because they run out of cash and can’t access enough finance to pay their bills and survive.

Some small businesses fail to control their costs. In other cases, their costs increase significantly beyond their control, for example, currency fluctuations can suddenly make buying from some overseas countries much more expensive. Major interest rates increases have at times also had a catastrophic effect on UK small businesses.

Sales

Some small businesses simply don’t sell enough.

Often sales decline over time and the business owner fails to introduce new products or otherwise act to recover revenue.

Competition

New competitors can enter the market and steal some or all of your market share. 

Or, market saturation might mean there are no more customers left to buy your product or service.

Late payment

Even for small businesses that make healthy sales, late payment remains a big problem. 

According to the Small Business Commissioner, about a third of payments to small businesses are paid late and a fifth has experienced serious cash flow problems as a result. The Federation of Small Businesses estimates that late payment causes about 50,000 UK businesses to fail each year.

Ecosystem

The failure of other businesses can have a domino effect.

Suddenly losing a major contract or a key customer can leave a large black hole in your accounts – one that can soon land you in serious financial difficulties.

Wider economy

There can be major issues in the wider economy that can cause the failure of businesses great and small. 

As we are seeing, Brexit and Covid-19 are having a major economic impact at a local, national and global level.

Initiating a business survival strategy

Business survival and turnaround experts often reduce business survival strategy into three key steps. 

First, you need to work out precisely how bad the situation is or could soon become really. 

Second, find a solution to your business’s immediate cash flow problem.

Third, address the basic issue(s) that created the major problem in the first place, which can prevent such problems from happening in the future.

First, you need to work out precisely how bad the situation is or could soon become really. 

Second, find a solution to your business’s immediate cash flow problem.

Third, address the basic issue(s) that created the major problem in the first place, which can prevent such problems from happening in the future.

Assess the scale of the problem

If you are to devise a robust survival plan for your business, it’s essential to understand the nature and scale of the problems you’re facing. Gather together all available information and be sure to understand it in financial terms – which requires assessing your cash flow.

If you don’t have a cash flow forecast – produce one. Accounting software makes this quick and easy, but even creating a basic spreadsheet that summarises your monthly outgoings and expected sales revenue allows you to see the full financial impact of the issue you’ve experienced, whether that’s added to your costs, weakened your sales or both.

Assess your likely cash flow for the next six months and identify specific dates when you risk running out of cash. Knowing what your cash shortfall is will tell you just how big a problem you must deal with.

Get expert advice and support

When something happens that could impact your cash flow it can come as quite a shock. All of a sudden you’re under much more pressure, which can make it difficult to think straight and act decisively.  

You might not know what to do – especially if it’s the first time you’ve encountered such a problem. But just because you lack experience, doesn’t mean others can’t help, so, reach out for support. Other business owners in your network could have dealt with similar problems and may be able to advise you. 

Other free sources of support are available, for example, your local Growth Hub. You could ring the government’s Business Support Hotline. Your bank should be able to advise you on finance (although bank finance might not be your best cash flow solution). Although you’ll have to pay, your accountant should be able to provide support. Your problems may not turn out to be as bad as you fear – or worse than you realised. 

Find ways to cut costs

You should always minimise your costs, but inefficiencies can build up over time. Every pound you spend unnecessarily will hinder your chance of survival, so assess all of your costs in all areas, and identify and eliminate all waste. If your business doesn’t need it – don’t buy it. 

Ask your suppliers how you could reduce your costs or get better value from them. If they can’t help – explore other options. Tough times require having to make some difficult decisions, which can include wages and staffing levels. Use your cash flow forecasts to work out how much you need to save, set cost-cutting targets and find ways to achieve them. Reconsider budgets in all areas.

Tighten up credit control

Having a well-functioning credit-control system is key to effective cash-flow management, while reducing the chances that your business will be affected by late payments and bad debts. Things can slacken off over time, so that your credit-control processes aren’t as tight as necessary. 

Look for ways to improve. Get your invoices out as soon as possible; remind customers that they’re due for payment a few days before due date; chase for payment when due and remain determined to get your money. If late payment is a persistent problem look into invoice discounting and factoring, which could provide a cash flow solution.

Increase prices

Increasing your prices could ease your cash flow concerns. Even a small increase can make a big difference. A small price increase may be long overdue. Knowledge of your customers and competitors’ prices is key when considering whether to increase your prices, but you should always try to protect your margins when faced with rising costs.

Boost sales to existing customers

It sounds simple, but often it gets overlooked. Why not try to sell more to your existing customers? It could be a much quicker, easier and cheaper way to boost your revenue, because it takes far more time and money to attract new customers. You could try giving existing customers slightly discounted bundled items or money-off offers. Maybe you could introduce a customer loyalty scheme. 

Finally, take the opportunity to stop wasting time and money on things that really aren’t worth it. Better to use the time on actual sales and customers, or on sales and customers that bring higher margins. Also try to find ways to make your processes more efficient.