4 Ways to Avoid Business Failure

Experience shows that following times of growth, a subsequent reversal in fortune can result in widespread business failures.

How could a business protect itself? Here are some simple steps that should help any business stay afloat:

  • Review your fixed business costs to determine whether they can be lowered by a reduction in services used and rendered.
  • Examine inventories and make reductions wherever possible.
  • Try to pass on price increases quickly if competition permits this.
  • Accelerate debt collection. Collection efforts should start immediately after the due date and not 30 or 60 days thereafter.
  • Reduce debt as much as possible and defer additional borrowings.
  • Try to anticipate changes in business activity by performing a trend analysis of your financial statements.

Two key things are required – good cashflow management procedures and clear management information.

  1. Cashflow management

    If your company is in cashflow difficulties, it may be unable to meet all its liabilities or pay its debts when they are due. Your company may be on target to make a profit at the end of the year, but if it cannot pay its tax liabilities, the bank or a major trade creditor on time, it may be heading towards insolvency.

    Many businesses become insolvent because the directors do not know what signs to look for in the early stages.

    Some of the signs of impending problems include:


    • Bank balance is steadily reducing.
    • Company has overreached its overdraft facilities.
    • Increasing borrowings just to keep the business running.


    • Sales remain static while stock levels are rising.
    • Outstanding debtors and/or potential bad debts seem to have increased suddenly.
    • Taking longer than normal to collect payments from customers.
    • Company relies on one or two customers who are not paying as well as they used to.
    • Increasing amount of work in progress that is not billed on time.


    • Long-standing suppliers are not keen to do business with you.
    • Widening your range of suppliers simply to obtain more credit.
    • Company is involved in contract disputes.
    • Company is receiving final demands or solicitors’ letters.
    • Little control over costs.


    • Too rapid growth (sales increases of more than 30% a year).
    • Decreasing sales.
    • Decline in pre-tax profits margins.
    • An increasing ratio of returns and allowances to gross sales (anything above 5% should raise a flag).
    • Significant declines in the gross profit or operating income as a percentage of sales.
    • Income increases that are almost entirely attributable to increases in closing stock.
    • Net worth increases that are primarily attributable to intangible assets additions.
    • Changes in accounting principles that tend to accelerate recognition of income or defer expenses.
    • Increasing proportion of assets subject to liens.
    • Growth in loans due to owners and officers.

    This list is by no means exhaustive, but it does give an indication of what to look out for.

  2. Action

    If you anticipate future difficulties, take remedial action immediately. If you do not, your creditors are likely to force the issue.

    The emphasis now is much more on attempting to rescue failing businesses rather than enforcing insolvency proceedings. This does not reflect a more charitable attitude on the part of creditors, rather the simple fact that they stand to reclaim more of their investment if the business is rescued rather than wound up.

    But rescue is not guaranteed. Whether or not a business can be rescued depends upon many factors – and the single most important is early action. The longer you leave the problem, the more difficult it will be to recover.

    We therefore recommend that if you detect just one of the signs mentioned above, you contact us immediately. We can then determine the seriousness of the situation and if necessary help you prepare and implement a turnaround strategy. This would include:

    Cash management – To survive long term, you need to survive short term, and this means implementing an aggressive cash management programme to make sure you have enough cash to keep the business going.

    Recovery plan – You will need to appoint a turnaround team who will help you prepare and implement a detailed recovery plan.

    Confidence building – If they are going to support you in your recovery efforts rather than pull the plug on you, your major stakeholders such as banks and suppliers need to be reassured that you have a viable plan and the necessary support to see it through.

  3. Strategy

    Of course, the best scenario is to avoid a crisis in the first place, and the best way to do this is to introduce a financial management strategy:

    • Prepare and follow a business plan.
    • Have your accounts properly audited at least every 12 months.
    • Use professionally prepared management accounts to monitor your business.
    • Prepare regular performance projections and cashflow forecasts.
    • Regularly measure actual performance against the projections and forecasts.
    • Monitor costs as closely as you do sales.
    • Watch debtors and creditors closely.

    These are all areas in which we can assist you. Why not contact us today to arrange a complete business health check?

  4. Management information

    Clear management information is required to keep on the right track. Directors of smaller companies often have no information, or poor quality information, which leads to poor decision-making. You may think that you know what’s going on inside your business but we have some questions to put to you to assist you in determining if you really know your business.

    As a director of your company, you should be able to answer yes to all of these questions after a brief review of your records and files.

    The business

    Do you know:

    • what the current annual turnover of your company is?
    • what your projected annual turnover for next year is?
    • what your current annual net profit is?
    • what your anticipated net profit for next year is?
    • who your main competitors are and how they differ from you?
    • the key performance indicators in your business?

    Do you have:

    • A plan for where it intends to be in three years’ time?
    • Clear priorities for capital expenditure?

    Do you:

    • prepare budgets biannually?
    • monitor the results of your budget plans?
    • check once a year the assets of your business, your insurance policies and the valuations put upon the assets?·

    Do your management accounts give you an accurate measure of performance?


    • Do you regularly check the performance of your suppliers in terms of price, discounts and credit?
    • Do you know how much of each type of item you have purchased by quantity and cost?
    • Does your supplier meet agreed lead times?


    • Do you calculate stock turnover figures monthly?
    • Do you know at any time how many of each kind of item you have in stock and where it is?
    • Are order quantities calculated to ensure that you do not overstock or run out before the next delivery?
    • What percentage of stock is effectively unsaleable?
    • Do you know the levels of wastage and/or pilfering?
    • Do you regularly check stock figures?


    • Do your letterheads and presentation facilities create an excellent impression of your business?
    • Do your reception facilities create an excellent impression of your business?
    • Do you know what percentage of your business is done with your top customers?
    • Do your sales records tell you which of your products/services are selling well? ­
    • Do you know how much of each product or service you have sold this month – in both quantity and value?
    • Are your payment and credit terms clearly notified to all who you do business with?
    • Do you know the current level of outstanding debt?
    • Do you evaluate the profitability of your major sales items?


    • Do key staff members contribute to business planning?
    • Do key staff members contribute to budget plans?
    • Do you know where you stand in industry terms on staff salaries?
    • Do you know how much time members of staff spend on being trained?
    • Do your staff members know the long-term aims of the company?
    • Do you have succession plans for all the key positions in the business?
    • Are all your meetings spent profitably?
    • Does everyone have a job description that is regularly updated?
    • Do you meet requirements without working overtime?
    • Do you always meet deadlines?
    • Can you guarantee that your products and services are of the highest quality?

The above questions are not comprehensive but may give you an insight into the health of your enterprise. There is no way that one can guarantee success but, by focusing on internal procedures, product quality and customer care, plans can be adopted which in turn provide some factors that can help a company become and remain successful.

Related Article: 10 Ways to Increase Your Profit