In our latest blog, Stephen Wainwright, partner at Poppleton and Appleby Manchester has shared his thoughts on how a business can protect itself from insolvency in challenging times.

A good business plan can mitigate future issues.

Never has the saying “If you fail to plan you plan to fail” been more appropriate in the current economic climate. When starting any business, it is hugely important that there is a comprehensive business plan put in place, but if you’re much further down the road, now is the time to revisit it.

When putting it together, consider what the next 12-months might look like, and ensure you review this monthly, especially in the current circumstances. At the very least look at this every quarter in line with the submission of VAT returns.

Your business plan should outline the following:

  • Realistic details of the product and services you provide
  • A detailed understanding of your competitors
  • An insight into how your business is going to be different and more appealing to the end-user
  • Rational sales forecasts and analysis of expenditure
  • Anticipated targets and deadlines.

If you are starting out, it is imperative that once you have completed your business plan that you make appointments with at least three accountants and three banks to discuss your business idea, collecting as much information from them and be prepared to accept changes to your plans if you are to succeed.

If you’re already up and running, then you need to consider the service you receive from your existing bank and accountant. Do they add value to your business and provide you with the necessary financial insights to help inform your decision making and long term planning? If not, it may be time to seek alternative advice.

Securing Finance

Securing finance is a significant concern to many SMEs, many of whom are unable to obtain facilities from high street banks.

High street banks are prepared to lend; however, they do require confidence not only in the directors but also in the company’s finances. Therefore, it is essential that when meeting with the bank, you provide them with the last 12 months set of accounts, any quarterly or monthly cash flows prepared in-house and a general view of the company’s finances. With this in hand, banks will look favourable at lending and if they are unable to lend, will very often be able to assist in obtaining finance from elsewhere.

If you are seeking a loan to purchase machinery or a tangible asset, the bank will look more favourably if you would consider making a personal introduction of working capital.

Track your financials

Starting any new business can have financial risk. A good accountant and bank manager will always be paramount within any business. They are there to provide constructive criticism, knowledge and expertise that you may lack. Therefore, it is paramount that you are prepared to accept such criticism and expertise to benefit you and your business. We suggest that you keep in contact with them at least every couple of months to stay on top of your finances and cashflow.

Cash flow issues are highly likely to impact many businesses in the current climate, therefore using digital tools to track your business finances such as QuickBooks and Kashflow will allow you to see your financial position at a glance, and will help you make better decisions to ensure the solvency of your business. An important note to consider is that you don’t just focus on business turnover; a successful business should focus on its net profit and how this can be increased… top line vanity bottom line sanity.

No matter what line of business you operate, profitability is always a challenge and its likely to become even harder for many companies to stay profitable. However, with adequate planning and management, businesses can mitigate from becoming insolvent if they act early enough.

To increase profitability or minimise losses, SMEs should now be analysing their outgoings and looking at where they can cut costs without impacting their businesses. So for example, if you are in premises larger than your needs, can you relocate to minimise expenditure? Or can you negotiate payment terms with suppliers?

Payments and Invoices

Be clear on your payment terms and stick to them. Make it clear on contracts and invoices what these payment terms are and that you will enforce late payment and interest charges and act upon that. No business wants to pay additional costs unnecessarily, so starting to implement these should get you paid quicker, minimising the impact on your cashflow.

Once work has been completed, an invoice should be raised immediately. For example, if you don’t raise an invoice until two weeks after the works have been completed and your terms of payment are 30 days, you are in effect, providing credit for 44 days. Consider having to buy supplies and the payment terms from your supplier you could be giving yourself an unnecessary cashflow headache!

Try where possible to avoid being paid by cheque and instead, seek payments online providing detailed information on your invoices of how to pay. If the business is in a position to do so, you may wish to offer a small discount of say 2% for payment within seven days, or for those clients on long term contracts, look to set up direct debits. This will undoubtedly help with cash flow, especially at a time where many businesses will be looking to reduce costs.

Take advantage of a business savings account and set aside money for VAT, PAYE, NIC and corporation tax payments. This minimises the risk of late payment charges and interest payments, and some business savings accounts pay a good amount of interest too!

In summary, the following is essential for any SME:

  • A good business plan can mitigate future issues. Ensure it is realistic, in particular around monthly sales forecasts and expenditure and review it regularly. When starting out review monthly then after six months at least every quarter in line with the submission of VAT returns.
  • Track your financials. There are lots of great digital tools on the market such as QuickBooks, Kashflow and many others that allow you to see your financial position at a glance. And don’t just look at turnover, a successful business should focus on net profit and how this can be increased… top line vanity bottom line sanity.
  • Invoice customers as soon as the work is done. Don’t wait until month-end, this is imperative if you are sourcing materials as you are likely to end up owing money before it comes in from your client which can put you in a tricky position with your cash flow.
  • Take advantage of a business savings account and set aside money for VAT, PAYE, NIC and corporation tax payments.
  • Obtain professional advice. A good accountant should offer more than just crunching the numbers, and they should be able to provide you with management accounts, cash flow forecasting and guidance around how you can improve your financial position. If your accountant just files your returns, start looking elsewhere.
  • Don’t bury your head in the sand when things get tricky. Speak with your accountant or a business recovery specialist. Getting help sooner rather than later can be the difference between your business being successful or going bust!
  • To reiterate the adage… fail to plan, plan to fail.

If you wish to discuss how you can protect your business from insolvency, contact us to discuss how we might be able to help.

Written by Stephen Wainwright, partner at Poppleton and Appleby Northern, Manchester office.