Kevin McLeod
Written By Kevin McLeod
Licensed Insolvency Practitioner
July 11th, 2023

Company directors can all too easily miss the warning signs that their business is in distress. It doesn’t mean you’re not good at what you do, in many cases, it just means you’re too close to identify the real issues. The first step to finding a solution is to acknowledge there’s a problem. Once you acknowledge there’s a crisis, you can work to turn the business around.

If your business is in real trouble, the best thing you can do is to reach out to the experts for help. However, there are also a number of simple steps you can take yourself.

Act immediately!

No matter how unpleasant it might be to tackle the problem head-on, this is not something you can ignore. The situation will not fix itself and there is a point of no return. The earlier you act, the more options you’ll have and the less long-term damage will be done.

Cash-flow shortfall or insolvency?

Insufficient cash-flow is the single greatest cause of struggling businesses in the UK. Slow payments from customers, holding too much stock, high overheads and even trying to expand the business too quickly are all common causes of cash-flow problems.

A cash-flow shortfall can be a temporary blip or a sign that something much more serious is at play. There’s a thin line between cash-flow issues and insolvency. As soon as a business becomes insolvent, the legal duties of company directors shift completely. Instead of prioritising the interests of shareholders, they must work to protect the interests of their creditors, which reduces the rescue options substantially.

Visit our insolvency FAQs or give us a call for help determining whether your business is insolvent. If your business is still viable then you can try the other tips listed below.

Explore your short-term finance options

If you’re experiencing a temporary cash-flow shortfall, you must take steps to free up cash quickly. Fail to do so and you could potentially be on the receiving end of statutory demands and county court judgements from suppliers and HMRC. They will damage your credit rating and could make it difficult to secure credit in the future.   

There are plenty of short-term finance options out there that are available to most SMEs. If bank overdrafts or credit cards are not available to you, or you’ve already maxed out your bank borrowing, invoice financing and merchant cash advances could be a solution.

Invoice financing, in particular, is an option that allows you to borrow money against outstanding invoices. Due to the way it’s structured, this form of borrowing is often available to businesses with less than perfect creditor records that do not qualify for other sources of finance. It can also provide a very quick cash injection to jumpstart your business.

Cut non-essential expenditure

If your business is struggling, one of the first things to look at is your costs. High overheads that are spiralling out of control can often sink an otherwise viable business. The first cost to eliminate is any discretionary spending. While team outings might do wonders for morale, this is the time to get back to basics. Are all travel costs essential? And perhaps there are vehicles or pieces of equipment the business could operate equally well without?

If you can’t make sufficient savings by reducing discretionary spending, take a look at your utilities and rent. Are you paying more than you need to? If faced with the prospect of an empty property, perhaps your landlord would be prepared to negotiate a short-term reduction in the rent?

More difficult cost-cutting decisions may also have to be made. Could you reduce the hours of staff without impacting business output? You may even have to consider laying people off entirely. Although it’s never an easy decision to make, it’s better that a few people lose their jobs than the business fails entirely.  

Reduce your stock

Another common reason many businesses struggle is simply because they invest too much of their capital in non-essential assets such as stock. Selling excess stock, even for a significantly reduced price, can free up the cash you need to pay off creditors, rebalance your business and start heading in the right direction.

Return to your core business activities

A common fault of small and medium-sized businesses is trying to take on too much too soon. Rather than focusing on the one or two activities you’re an expert in, the temptation is to diversify into new areas to increase income and grow the business. However, diversification brings substantial costs, opens the business up to new competitors and often detracts from its core operation.  

In times of trouble, taking the business back to its profitable core activities will give it the very best chance of success.

Communicate with creditors

When you’re struggling to pay your bills, it can be very tempting to bury your head in the sand and hope the problem will go away. This is almost always a big mistake. Calling your creditors to explain your situation and how you plan to repay the debt is a much better approach to take. Most people will be willing to work with you if they think you’ll eventually repay the money you owe.

This is particularly true of lenders such as the banks. If you miss a repayment, there’s every chance the bank will call in the loan, which could be the final straw for your business. Clear and honest communication with the bank, and having a sound plan to improve your situation, could buy you the time you need.

Seek professional advice

If your business is struggling, it’s essential you act quickly, understand your options and seek advice. Contact AABRS today for confidential, no-obligation assistance to help you turn your business around.