Signs a Business is Failing

It’s rare that a company implodes overnight. In most instances, ventures sputter out over a fairly long period of time before the owners begrudgingly hoist the white flag. Because of this, it’s useful to be aware of the main signs a business is failing so you can take action early on.

The key to identifying signs a business is failing, is mainly being able to accept them. It can be easy for owners to spot some of these signs within their own company but make excuses for them. Try to adopt the mindset of a newcomer and outsider to your business instead. Somebody unattached to your company will care little for any hard-luck tales and promises of turnarounds, and instead see the business exactly for what it is.

Multiple businesses close each day, and there’s no shame in admitting that yours might be struggling. The current economical landscape has made this one of the most difficult periods to navigate a business through in recent times.

 

A difficult time for UK businesses

In fact, many business failures occur as a result of outside forces rather than any obvious mismanagement. For example, you could lose a significant client to a rival, your industry could be in a state of a serious recession, or you might be in debt due to the non-payment of a major bill.

Whatever the cause of the problems in your business though, it’s important that you know what to look for if they do occur.

The list below covers a few things you should be mindful of. You should also bear in mind, however, that the occurrence of any of these things does not automatically mean your business is going to fail. Neither does it mean that your business will require a formal insolvency procedure such as a company voluntary arrangement or pre-pack administration.

While some of the scenarios listed might already be a part of your bigger business plan, you should be wary of any of them happening unexpectedly.

 

Signs a business is failing

Customers are making late payments

This might not seem like an issue right away, but if customers aren’t paying on time and don’t feel they have to, you might have a serious cash flow problem waiting to rear up and catch you unaware. Create better negotiating strategies or look into tighter payment schedules to catch this before it becomes a real problem.

Even if a business is generating millions of orders, if it isn’t receiving payment from customers for work done, it’s one of the telltale signs a business is failing.

Your cash flow could be seriously affected by delayed payments. Chase defaulters with strength and persistence, and impose more stringent terms on them the next time you do business. You could also ask for deposits, while also reducing your invoice payment terms.

 

Wages aren’t being taken by directors

When the top brass or key players in your company aren’t drawing a wage, what are they saying about their confidence in the company? If this is happening for protracted lengths of time, it may well be a problem. Directors not taking a wage should ask themselves if they’re being honest with the state of their company.

 

The company can’t pay bills on time

Whether this is employee wages, paying suppliers or simply energy bills, if the company can’t meet its most basic of functions, then there may be trouble ahead. It’s time to take a serious look at your cash flows in order to resolve this.

 

Clients keep leaving

If your previously happy clients aren’t pleased with your product, standards of service, or the way you do business now, then you may have an issue.

Losing big contracts can be a sign of change but also a step in an unknown direction. This shouldn’t be a time to lose your nerve. However, it is necessary you stay alert to see how this change affects your business as a whole.

You could find out that you have no need to worry after all, as you could end up signing a more lucrative deal than the previous one. However, if you find it difficult to find a contract as profitable as the previous one, you could find that things get difficult quickly.

 

 

Staff keep leaving

Staff can smell failure a mile away, and often notice when things aren’t going well. If a company starts to shed too many staff, especially any long-serving and otherwise loyal individuals, then it might be time to take a critical look at your business’s strategies and policies.

If your business is experiencing a high turnover in staff, then it may be a sign that things are either unworkable or there’s a canyon between what you are paying and what the going rate might be.

Recruiting good staff can be difficult, with a more demanding workforce seeking more from employers now. If you’re unable to keep up with your competitors on wages, you’ll soon be left behind.

 

Cash flow problems

Weak cash flows have toppled many businesses, even those that had seemed sturdy and successful before.

Cash flow is chiefly concerned with the inflow and outflow of money in a business, but the time and frequency in which these happen is also crucial.

Periods when too much money flows out at once or when incoming payments are late can take a heavy toll on operations. If you find yourself struggling to pay suppliers, employees or HMRC on time, chances are that you already have a weak cash flow.

Since businesses are usually involved in many dealings simultaneously, it might be difficult to find out what the source of the problem is. It’s crucial that you get to the bottom of the issue though, before it becomes a big problem.

Make it a constant practice to check your inflow and outflow. This habit helps you to determine how much money your business is paying out on a regular basis. Once this is highlighted, you can start to cut any unnecessary costs and make sure you’re getting paid on time.

If you can see the liquidity of cash vanishing before your eyes, you might have a problem. This can look like several different things, sometimes all at once. Are you unable to pay staff regularly? Are there bills you keep deferring, or is there not enough in your reserves to pay several bills at once? This may be the tipping point for your business. Address the causes of cash flow woes at the root, and your situation might be recoverable. Carry on with your head in the sand, however, and you’re likely to see any issues quickly become insurmountable.

 

Trade slowing down

Noticing that you’re not receiving the same number of orders you once were can be a giant red flag. If you’ve noticed more quiet periods that allow you to catch up on your admin tasks recently, or spotted that your stock levels have been running a little high, it could be that demand in your service has dropped.

When this happens, you should take time to find out what is going wrong. Are your rivals destabilising you? Are your services or products now obsolete? Is your entire sector struggling? It could be time to make some tough decisions.

 

Needing longer payment terms

Are you constantly requesting longer payment periods from your creditors? Ask yourself if you’re just trying to manage your cash flow or if your business is already in distress. If you find that you can’t make the due dates for your debt repayments, you could be technically insolvent already. If this is the case, you’ll need to get a professional to check your business over before it’s too late to take action.

 

Additional borrowing

Looking for additional funding can be a promising sign that growth and expansion is around the corner, but it could also serve as a sign that things are not very well with your business. If you’re not planning to use the money to expand, and you’re just looking to get yourself out of a hole instead, you’ll need to be careful with your company’s next steps.

 

Finance is harder to attain

Getting a favourable finance deal is difficult right now, but if you can’t even get close to conversations about borrowing, then your status as a solvent company may be on the wane. If previous lenders or suppliers also refuse to grant you favourable terms, then it might be time to look inwards at your operations. These lenders are clearly seeing something about your company that they don’t like.

 

Valuation fluctuations

It might sound obvious, but valuations can be key to understanding just how well your business is doing. Like taking the temperature of a business, a valuation can be a brilliant signifier of financial health. Our own online valuation tool is a simple and free way to discover the current market worth of your company.

When the value of your business dips to a lower level than it’s enjoyed previously, it’s a good idea to rethink where things are going and to act while you still can. It doesn’t necessarily signal the end, but it’s certainly a point where reviews need to be carried out.

 

Having to make unplanned staff cuts

There’s something to be said for forward planning, especially when it comes to staff or your workforce. Remember that by employing people you are supporting not only their livelihoods, but their families’ too.

Having to make unplanned cuts means that the financial distress you’re experiencing is now being passed on to others too. This can often be the point that business owners accept that their business is in trouble.

 

Lack of capital investment

When was the last time you upgraded equipment, relocated due to growth, or bought in new software for your staff?

If it’s been a while, it could be pointing to your own lack of confidence in your business to stay afloat or continue to grow.

If you were honest with yourself, what would your summation of your business be? A steady, well-run ship or a company in need of desperate attention?

 

 

Can you turn it around yourself?

It’s one thing being familiar with the most common signs a business is failing, but without the knowledge to rectify the situation, the signs are wasted.

The best thing any business director can do is to call in assistance quickly. Our consultants our always on hand to provide free, no-obligation advice for companies that get in touch. We’ve helped countless business owners to get their companies back on track by navigating various challenging circumstances, and have amassed a nationwide network of grateful directors over the years.

That being said, if you’re still wondering what to do when a business is failing, there’s still plenty that can be done yourself. By taking a proactive approach to reviving your business, you’ll give it the best possible chance of survival in the long term.

Any director or owner that has identified one of the signs a business is failing should look to implement some of these changes right away.

 

Is the fundamental underlying assumption still valid?

By fundamental underlying assumption, we mean the reason that makes customers spend their hard-earned money on your product or services.

For example, a discount store assumes people will want to spend less for branded products, and an ice cream van assumes that people want an ice cream in the park when the weather is nice.

Think about the assumption your company makes in order to keep customers coming back, and consider whether the assumption still rings true.

Changes in the economic climate and developing technology (along with other factors, of course) can quickly change people’s spending behaviour. If you find that this could be the case for your company, you’re left with two choices: pivot or cut your losses.

A successful pivot is not easy to pull off, but if you think your company’s main offering only needs a little tweak, it can certainly be done. The key here is to be honest about how large a change this would mean for your business. If an Italian restaurant suddenly realises that a takeaway pizza service is more lucrative, then it’s merely a short step from where they already where. If a graphic design agency wanted to trade as a butchers shop, meanwhile, then we’re looking at a different business entirely.

Unfortunately, it may be possible that your business idea has become outdated. If this is the case, it is likely that the right option for you is to close your company.

 

Take steps to improve your cash flow

It sounds like a simple mistake, but it’s very common to find businesses that offer much longer payment periods to their clients than they receive from their suppliers.

If your suppliers are chasing you up for payment after 30 days, but you’re allowing your clients to pay you within 60, it doesn’t take a business genius to see how that can manifest itself as a problem down the line.

 

Is your wage bill crippling your business?

This point will seem obvious, but it’s not always so clear how to cut costs that appear to be essential to continue running your business.

The largest expense for a company is often payroll, which is unavoidable without taking the drastic step of laying employees off.

Or is it?

There are other options. For example, you can start by looking into the potential of cutting underutilised employee benefits, or even consider shortening your working week. While both options may sound drastic, they may be the only way you can keep your employees in a job. Cuts are understandably unlikely to go down well with staff, but you may be surprised by the reaction to a shorter working week. More and more people are placing great emphasis on their work/life balance when it comes to choosing a job, and this may be the more popular option of the two. Speak to your employees to see what works for them.

 

Laying off staff

If you are in the position in which laying off employees is the only viable option apart from shutting your business down, you’ll need to be prepared to make some hard decisions.

It’s never pleasant to lay employees off, but by making cuts you may be able to at least save some. This is of course far better than allowing the bloated wage bill to sink the company altogether and make everybody redundant. Try to keep in mind as you make your cuts, that the process can often be the lesser of two evils in terms of outcomes.

The least demoralising way of making employees redundant is to cut heavily. Piecemeal redundancies will unsettle staff considerably, and have them looking over their shoulders in case they’re next in line. You’re far more likely to see employees leave for other jobs if they don’t feel secure in their role. This can sometimes be helpful in the circumstances, but if you have workers that you’re keen to retain, it can be a risky move.

It is also worth explaining to your remaining employees that although you hope to avoid laying more people off, if sales targets aren’t hit more jobs may have to go. This will help them to understand your position and motivate them to work towards the same goals that you have set yourself.

 

 

Are there any other costs you can reduce?

Look at energy costs, Wi-Fi services, and your rental lease. Can any of these be renegotiated?

If not, there may be scope for cutting down on business travel. Try to arrange meetings on Zoom or other online platforms instead. Outside meetings not only cost in petrol, but they’re often accompanied by expensive meals, and time lost by not being in the office.

You may even have the ability to sublet part of your premises. This could be to another business or even an individual tenant.

 

Have you collected all money you are owed from debtors?

In addition to cutting your costs, you should also increase efforts to collect any money that is currently owed to you.

The best piece of advice here is to talk to your clients about what the problem is – if they aren’t ignoring you, they probably want to pay their bills but have a reason for it taking longer than they expected. Others, unfortunately, simply don’t want to pay up.

Put most of your efforts into collecting invoice amounts from clients who want to pay.

For those that aren’t playing ball, if the contract you have drawn up reserves the right to do so, add late fees onto their bill and consider threatening them with CCJs (County Court Judgements) so you are taken seriously.

If your collection efforts are unsuccessful, or if they don’t yield enough to get your company back on track, it may be time to close your business.

 

Can you wait out the economic downturn?

If you believe your business model is still viable and think the company could return to profitability once the economy rebounds, you could consider putting it into hibernation.

In simple terms, this strips your business to its core by cutting all costs and functioning at a minimal level. This enables you to focus your efforts elsewhere while the bigger profits are not being made.

As an example, let’s imagine a premium coffee shop that charges £3 per cup. To hibernate, the owners of the company could terminate their contract with the company they are leasing their commercial property from and move operations into their homes, while operating a website-driven coffee business

Special orders for coffee beans could still be taken over the phone and internet, and when the economy recovers – and the public’s desire for expensive cafés revives – the company could return to its full operations.

Of course, this is only really an option if other sources of income are available – you may need to take on an extra job or part-time role while you ride the economic storm out.

It is a common misconception that once you have closed your business you aren’t able to start anew on a different project.

If done properly, there is nothing to stop you from opening another business with the added advantage of experience behind you.

 

Spotted any of the above signs a business is failing? We can help

They often say that business owners don’t spend enough time on their business as they are too concerned with being ‘in’ it instead. This is never more apparent than when businesses find themselves on a precipice. The old phrase about ‘not seeing the wood for the trees’ rings especially true in these situations.

Make sure you watch out for the signs a business is failing mentioned above and act quickly. More often than not, you’ll be able to come up with a plan to help rectify the situation. However, if you ignore these signs for too long, the efforts you take to revive your business could prove futile.

We’ve helped countless business owners to navigate challenging circumstances. Call us on 0800 975 0380, or email [email protected] for a free consultation to find out how we can help you.