Pitfalls to avoid as we emerge from lockdown
How to avoid insolvency
I am constantly asked how to avoid insolvency and, whilst there are a myriad of different ways depending upon the circumstances of the business, it often boils down to:
- Don’t run out of cash
- Don’t fall out with people
- Don’t take your eye off the ball
- Don’t bury your head in the sand
Easier said than done? Here are some things to consider.
Running out of cash can be a result of many different factors but it can be mitigated with good cashflow management and forecasting. These can enable you to:
- Identify inefficiencies
- Reduce uncertainty
- Scope contingency plans
- Guide strategic direction
How to identify inefficiencies
When we take the time to prepare forecasts, we must make a series of assumptions and where better to start in the formation of those assumptions than in reviewing past performance.
- How long do we take to pay an invoice?
- How long does it take us to collect an invoice?
- How long is stock held?
- What is the value of WIP locked up?
We can then plug these into our cash flows to start to build a picture of the future. We also have the opportunity to make improvements and paint the future differently to the past.
When an economy contracts as a result of a significant event, there is naturally a lot of uncertainty. A prospering economy is built on certainty and this breeds confidence which enables money to be spent and the economy to grow. We cannot individually influence the macro economy but we can influence our own businesses and look to reduce uncertainty within them in order to survive and potentially continue to grow. We can do this by reducing risk in areas such as sales and credit control.
For example by asking:
- Who are our customers?
- What risk do they pose? Have we risk assessed them?
- Are we insured?
- Have we reviewed our terms and conditions?
Scope contingency plans
By looking at what the future holds and preparing forecasts, we start to assess the health of our business and we can consider contingency plans earlier for any ‘what if’ scenarios.
- What if a significant customer stops paying?
- What if a significant machine fails?
- What if a significant proportion of the workforce becomes unwell?
- What if I do end up falling out with someone?
- What if my key supplier’s insurer pulls cover?
- What if my key supplier fails?
Guide strategic direction
Forecasting can also assist in guiding the business strategy alongside a strategic review. This is where you pull up the business plan and review it. Does it still work? How has the business evolved and, more importantly, how is the business likely to evolve in the coming years? We can also start to ask the more difficult questions. These difficult questions are easier to ask when you are not connected to the business as they are also easier to identify. This is where professional advice and assistance is really valuable because the challenging questions are what enable a business to really develop.
- Is there still sufficient demand for my product?
- Do external factors mean adaptations are required?
- Can technology make my product better?
- What does the customer of today want? Is it just a product or should it include delivery and aftercare?
Sometimes there will no longer be a demand for a product. Remember VHS videos? Those that ask questions soon enough will have a better chance of gauging the right time to diversify or wind down the business in an orderly manner.