How to turn your business around

If your business is showing signs of getting into trouble – eg difficulties finding cash to pay suppliers, constantly up against borrowing limits – there are plenty of ways to bring your business back on track. If you act quickly and smartly, you can maximise your chances of turning your business around.

You need to identify the problem and all your options to solve it. Planning is important to test your proposals and make sure they are viable. Planning is also essential if you hope to get financing to fund expansion or cover your expenses until you are back on track.

This guide outlines a number of ways you could rescue your business if it is in trouble, how to recognise when your business is beyond saving and how to exit in a way and a time of your own choosing.

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How to assess your business and plan for improvement

Before you can make any change to your business, you need to identify where the problems are.

Look at your business plan and accounts. Where does reality not match up to what you anticipated? How long has the issue existed? Is it a temporary problem or something more longstanding?

Many businesses find it beneficial to use an accountant to work on their business’ finances. A professional will be able to give you an insight into where your problems might be coming from.

Your cashflow is one of the most important aspects of your business. Without enough liquid assets to pay your bills, your business will fail. A cashflow forecast will give you a good idea of how much money you have coming in and out of the business, even to the extent of keeping track on a daily basis. See the page on cashflow forecasts in our guide on cashflow management: the basics.

Once you have a good sense of what is happening in your business, you can make plans that put you back in control. You can also adjust your business plan, forecasts and budget and check that your proposals make sense. It may be necessary to reduce the amount you take out of the business until profitability and cashflow improves.

It is important to keep your business plan and other documents updated, and refer to them frequently, so you can see whether your changes are having a positive effect. If you decide you need financing, any investor will want to see your detailed evidence of plans to improve the business. You cannot expect an investor to commit funds if you do not convince them that your business has a reasonable chance of success.

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How to improve your cashflow

Cashflow is the lifeblood of your business. You can survive a lack of sales or profits for a short while, but if you are unable to pay your bills then your business will ultimately fail.

If your business is finding it hard to pay its debts, you need to make sure you are collecting all the money that is due to you. Have a system to quickly identify when payments become late and always chase them up. You have the right to charge interest on all late payments.

If you lose control of debts owed to you, then your debt-to-asset ratio will increase, resulting in most of your business assets being financed through debt. Your debt-to-asset ratio is your total liabilities divided by your total assets. If your business has a high debt-to-asset ratio it can be dangerous, especially if creditors start to demand repayment of debt.

Tightening cashflow

There are lots of ways you can tighten up your cashflow and get your customers to pay on time.

Payment terms – you need to agree terms and conditions with your customers that set out items such as credit limits and when you expect to receive payment. Having clarity on these issues makes it obvious when a payment becomes late. For more information, see our guide on invoicing and payment terms.

Invoices – send out invoices promptly with all information clearly set out, eg amount due, payment due date. If you do not send an invoice, you will not get paid, and if you send an invoice with confusing information you are simply giving your customer an excuse to query and delay.

Recovering debts – if you can’t get your customer to pay you, there are a number of options available to you.

Factoring – when trying to recover unpaid debt you can sell invoices to a third party, in a process called factoring. Another method of getting cash quickly is invoice discounting, which is only open to certain types of businesses. Both of these incur costs, but could be considered as a way to release capital. See our guide on factoring and invoice discounting: the basics.

Credit checks – if you take on new customers to improve sales, make sure you run credit checks. You do not want to add a bad payer to your existing problems. See the page on credit checking potential customers in our guide on getting paid on time.

Cashflow forecast – keep and maintain a cashflow forecast, so you know when money is due to come and go out of your business.

For more information, see our guide on cashflow management: the basics.

Overtrading

However tempting it might be to attempt to turn your business around by simply pushing for more sales, you should first assess whether your cashflow can handle a sudden increase in trade.

If you take on more business than your cashflow or current assets can cope with, you could be at risk of overtrading. Overtrading occurs when you try to fulfil an increase in orders without having the working capital to cover the costs involved – eg overtime, extra stock and supplies – before the money from sales comes in. Overtrading is extremely serious and could cause your business to fail. See our guide on how to avoid the problems of overtrading.

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How to respond to changes in the market

Many things can change the market your business operates in, from new competitors and innovations to a general slowdown in the economy. If your business is in trouble, you could benefit from fresh information on your market, customers and potential customers. You might discover your sector has changed and that your lack of response has contributed to your problems.

There are a number of places where you can get information, some of which are free, including:

• government reports and statistics
• local Trade Associations
• Chambers of Commerce
• local authorities
• commercial publishers of market reports

You could also do your own research, which will allow you to target the issues and markets you are most interested in. For more information, see our guide on market research and market reports.

Once you have some information about the way the market is moving, you can see whether your business could be made more competitive. If demand for your product or service is shrinking, you could consider diversifying into other areas where you have existing skills and technical expertise.

Customers and competition

An alternative strategy could be to exploit a currently underserved niche. Do your customers have any needs you could potentially fulfil? Is there anything you do particularly well that you could focus on?

Your customers are an extremely useful commodity. Take advantage of your existing relationships to see what they think of your business. You should also try to identify your most valuable customers and do more trade with them. Use the Pareto principle (often known as the 80/20 rule) – it suggests that around 80 per cent of your profit is gained from 20 per cent of your customers.

Changing your pricing strategy is another option. Raising prices will help your profit margin but total sales may fall, so re-emphasising the benefits of your product or service can offset the impact of a rise.

Cutting prices may seem counterintuitive but could encourage new sales. Be careful, however, not to let quality or service slip at the same time. For more information on the advantages and disadvantages of changing your prices see the page on raising or lowering prices in our guide on how to price your product or service.

One reason for your business having financial difficulty could be the entrant of new competitors into your market, or existing competitors expanding or doing something different. Find out as much as you can about what your competitors are doing and plan a response. Do not imitate them – they have already staked out that area of the marketplace – but select ideas that would work for your business and innovate.

For more information, see the page on how to act on the competitor information you get in our guide on how to understand your competitors.

If your competitors are larger, you can still succeed. Small businesses have the flexibility to quickly develop new products or services and a closer connection with their customers which can build loyalty. For more information, see our guide on competing in markets dominated by big brands.

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How to make your business more efficient

Making your business more efficient will save time and money. This is often taken to mean cutting costs but, while cutbacks can be a part of it, there are other routes you can take.

Business processes

Are all your business processes as streamlined as they could be? Are there examples of bottlenecks or duplication of effort? Talk to your staff, as the people doing the tasks regularly will probably have ideas for how they can be improved.

Cost-effective staff

Make sure you’re getting the most from your staff. Do they all have the right skills they need to do their jobs? Are they motivated to do their best for your business? If they pick up on the possibility that the business might be failing, productivity may drop and valuable staff might leave. Bring them in on your plans early and ask for their feedback. Reassure them that you’re doing everything you can to safeguard the business and their jobs.

Sometimes you may have no choice but to consider reducing staffing costs, through reducing hours or making redundancies. Remember that making redundancy payments could increase costs in the short term, and may cause the remaining employees to feel insecure.

Reducing overheads

You can reduce overheads in other areas, like cutting back on advertising or purchases of new equipment. However, be wary of sacrificing long term investment for the sake of short term cost savings. For more information, see the page on how to reduce overheads in our guide on how to avoid insolvency.

You should also review your assets and consider whether any are surplus to requirements and can be sold to raise cash. This might include unused land or stocks.

You should consider reducing waste, write-offs and theft of stock. This is an area where most businesses can make significant gains in their gross margin percentage. Theft is estimated to represent 1-2 per cent of a retail business’ turnover – that represents a significant potential increase in the gross margin if it can be eliminated. With those possible gains it is worth considering security measures – eg mirrors, CCTV, or more staff on duty at peak times. Better stock management can reduce write-offs from having to offer a discount on unsold goods or throwing out perishable stock after its sell by date.

Occasionally the situation may require more radical solutions – eg to stave off bankruptcy. If you need to restructure your debts, an Insolvency Practitioner can help you. For more information, see our guides on insolvency options for individuals and liquidation and alternatives for companies and limited liability partnerships.

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How you can improve your profitability

There are several options to consider which may improve the profitability of your business, such as increasing trade or re-evaluating individual or entire financial aspects.

Whatever area you exploit, you will need to know your business inside out to improve performance and maximise the potential for profit. For more information, see our guide on how to increase your profitability.

How to check and measure profitability

Apart from ensuring your cashflow is under control, you must also regularly check your profitability. The net profit is the amount of money left after paying all your bills. It determines how much money you can safely take out of the business for your living expenses and to pay taxes.

You will receive an annual set of accounts from your accountant. However this can be up to nine months after the end of the financial year. You need to check profitability much more frequently and more promptly, using monthly or weekly figures.

A good approximate measure of profitability is the gross margin. The gross margin is the value of sales less the direct cost of sales. So, if sales are £200 and the cost of sales were £120 the gross margin is £80 or 40 per cent on sales. Why is this so important? Firstly, the gross margin is a means by which different businesses can be compared. If a florist’s gross margin is 50 per cent and a newsagent is 20 per cent the latter has to sell 2.5 times as much value to achieve the same gross margin. So, gross margin is a unique basic comparison of differing businesses.

Secondly, to calculate the profitability of a business all you have to do is to deduct the business’ overheads from the gross margin. So if the gross margin is £1,000 and the overheads are £600 the net profit is £400. Overheads tend to be fixed in the short term so gross margin becomes a good indicator of profitability and can be calculated quite simply.

For more information, see our guide on how to set up a simple profit and loss account for your business.

Alternatively, your accountant can help you set a basic measurement of your gross margin on a weekly or monthly basis. They can also help you understand other important ratios in your accounts.

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How to close down your business

Sometimes, despite all your best efforts, your business may fail. Rather than continuing to fight a losing battle and increasing your losses, it might be better to take a decision to wind up your business before you are forced into insolvency by a creditor.

You can either close down your business yourself or you can find someone willing to buy it from you – though, as you would be selling a failing business, this option is unlikely and you wouldn’t receive much in return.

For more information, see the page on exit option: close your business in our guide on how to consider your exit strategy when starting up.

You should write a plan outlining everything you need to do, including closing customer accounts, notifying staff and disposing of assets.

Tax implications

Regardless of how your business closes, you may still have to file Company Tax Returns and pay Corporation Tax and Capital Gains Tax.

If you don’t have the expertise in-house, you will need to engage specialist professional advisers to make sure you notify the right people and complete your tax and other financial obligations.

You can also find information on selling or closing your company and Corporation Tax on the HM Revenue & Customs (HMRC) website- Opens in a new window.

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CASE STUDY

Here’s how I turned my business around in difficult circumstances

Transcript

Steve Wrieden: “My name is Steve Wrieden. I’m the Managing Director of the Hornbeam Group, which is a group of companies that we’ve developed over the last few years that specialise predominantly in the building industry.

“We have a loft conversion business called North London Lofts. We have the Base Room company, which builds basements under peoples back gardens. We have a home improvement company called Hornbeam Home Improvements and we have a hamper business called Give a Hamper.

“I was a manager within the company – I could see it was in trouble. The cashflow was tight, cheques were bouncing. The directors at the time were just pumping more and more money into the business to keep it afloat.

“As I was sitting on the sidelines watching the business as it was starting to fail, I could see how we needed to change and bring in new strategies to get our clients to pay more regularly, to be able to increase the cashflow.

“Eventually it came to a point where we had to call it, and the banks had lost confidence in the business as it stood and it was just time for it to end really. I had a dream and desire to run my own business and I could see that I could, with help, make this business work and so I took the business out of administration and took it forward.

“One of the first things I did when I took the business over was to look at the processes in the way that we did things and evaluate every area of the business. So I would look at the suppliers – were we getting a good deal from them? Could we get a better deal with them? Could I keep confidence with them? Could I build a relationship with them? Could I change the way that we build a loft? Could I look at the way in which the process came together? I looked at the administration of the business – was that something that needed attention? Yes it was, so I brought in some administrative staff. I looked at the accounting processes and I changed the accountant.

“The suppliers and the bank knew that there were problems with the business because obviously they were having cheques that were not being honoured and the accounts were filling up to beyond their credit terms. I went round and saw all of the creditors that the previous company owed money to, and I went and negotiated with each one of them a settlement figure on the money that was owed from the previous business, and then I worked that out over time as we took the business forward.

“The suppliers and the creditors that we had in the previous business generally are the same people that still we use even today – three, four years on, so we managed to keep a really good relationship all the way through.

“One of the things that I saw is that we could brand ourselves better so we got new, big scaffold banners that were on the side of our scaffolds. We rebuilt the website. We made sure that we were high up on Google on an internet search, and we wanted to build on recommendation so we decided that we would drive ourselves and build our business on the work that we did – the quality of the work that we did – and on getting a good reputation. Over 60 per cent of our work now is based on recommendation.

“I think the main hurdle in turning the business round was confidence – did I have enough confidence in myself that this was going to work? Because when the chips are down I think you generally look at yourself and think well, what have I done wrong? Where have I gone wrong or what mistakes did I make? So I think just knowing that you’re making good and right decisions is really important and being able to stand by them and having confidence that actually yes, this can go forward.

“Obviously when I took over the business I was looking at all the different areas and one of the areas was expansion – where do we go from here? Do we continue to build lofts? How many lofts are there in London that can be built? How many of them are we going to actually build? And I wanted to expand and diversify a little bit.

“So we looked at other areas of business. One of the areas that we looked at was garden rooms. We thought, well why don’t we start building log cabins – we’re carpenters! And as we went down that process of looking at other areas, we came up with an innovation which is a base room which is what we’re sitting in at the moment – which is a room that goes in your back garden, that is underground and unlocking space within your property, which for us was great because that’s what we’re about.

“We love the idea of turning something that really has no value as a dark and empty space in the loft or ground underneath your garden and turning into something of real value and so it was really exciting to look at other areas of business.

“So now we have base rooms, which is our own innovation, which we’ve won awards for and it’s taken us on a fantastic journey.

“My advice to anybody who’s in difficulty and realises they need to change their business around or they need to make a change. Then just take a good, long, hard look at yourself and your business and make the decisions that are going to really… they might be hard and tough decisions, but make the decisions that are going to change things, that are going to make you feel better and get the right people into place, look at your strengths and your weaknesses. You work on your strengths and find someone to come alongside you that has a strength that is your weakness, but make changes and make those tough decisions.”

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