Managing and maintaining a successful business is hard work, whether it’s a big hitter in the market, a new start-up or even if it’s the top dog. Unfortunately, for a lot of businesses, they won’t turn out to be a huge success. It could be down to a variety of reasons, unlucky with your cash flow, hit by a large debt, or perhaps the marketplace just isn’t ready for your big ideas. But if the business ends up having financial difficulties, it doesn’t necessarily mean that things have to end. Depending on the situation the business finds itself in, there are ways of potentially getting yourself out of trouble.
Debts, negative cash flow and financial troubles
Every business needs a cash flow forecast as it should give detailed information of how the business is performing financially. This includes everything, money coming in and out of the business, overheads, employee costs and all potential invoices. However, this doesn’t necessarily mean that a business will be able to predict everything, and issues will always occur. What’s key for owners, is that they don’t bury their head in the sand and attempt to tackle financial issues head on.
Clients who don’t pay on time
Unreliable clients are typically a problematic area for businesses. If a client breaks their payment terms and ends up paying late, it can have a massive knock on effect with regards to cashflow. A business could be waiting on incoming payments, only to be let down, therefore holding up impending payments to suppliers, payroll or other potential outgoings.
Invoice finance could be a viable solution for this sort of problem, effectively it enables a business to get an injection of cash, from a factoring company. This is an advance and its value is based on unpaid invoices. Typically, a factoring company will first assess the quality of the invoices which are due to be factored and can then lend up to around 90% of the invoices value. They will then collect the unpaid invoice, getting back what they’re owed, before taking their fees and finally returning the change to the business. There are huge benefits to invoice financing and in a scenario where clients are late payers to the business it can be hugely beneficial. Factoring companies, however, are only likely to take this sort of work on, if they see genuine potential for the business and late paying clients are simply holding up its progress.
Creditor pressure simply too much
Sometimes troubles with cash flow can be so great, it results in intense pressure from creditors. This sort of pressure can leave businesses constantly behind and always looking over their shoulder. If creditors are always pressuring and a business struggles to find ways to make repayments, that negative effect can sometimes take a business under. In situations like this, if the business is genuinely viable, a business may need to enter into a formal repayment plan. This is a gradual way of repaying creditors and keeping control of the businesses finances.
Unless the business has a chance of being able to continue, a repayment plan is unlikely. Owners must be able to show a genuine business plan which shows that without creditor pressure, it could be successful. Instead of buckling under and going down the route of a dissolution or liquidation, a repayment plan such as this, would be known as a company voluntary arrangement (CVA).
Scrap the company and start a new one
Sometimes the only thing a business can do is close things down and start a fresh, which might just be the last resort for struggling businesses. This can happen in the form of a pre-pack liquidation, which although technically means liquidating the company, a new one is born out of the ashes of the closed company.
This is called a phoenix company and typically ends up having the same board of directors as the old company. As the old company closes, if the directors have the funding they can buy the options back from the old company, along with any unfinished contracts. A phoenix company is perfectly legal and is technically a brand-new company, with all unpaid debts dying with the old company, however, it cannot use the same name as previously. All assets must also be bought at market value.
Even with an intense planning structure and a well-crafted cash flow forecast, at some point the business will struggle. But it is all about how the business copes with those difficulties, the more planning and preparation the better, however, there are ways of salvaging the business and getting out of trouble.
