How to Spot the First Signs of Failure
Ed Surman, Director at Mushroom, interviewed Ron Mitchell of Business Rescue UK, for his podcast, Business With The Fun Guys. The podcast interview is available here to listen to, however we’ve taken the main points of Mitchell’s teachings and outline them below:
Businesses In Trouble
Business owners or directors don’t aim to get into problems and this usually only happens once, therefore they have no experience. Some will wait till the 11th hour before getting help. The earlier you contact someone for advice and help, the better, however there is always opportunity for recovery and success, if you get the right support.
When your business is in trouble you might contact an insolvency practitioner, accountant, or you could contact Business Rescue.
One of the options for a business in trouble is to contact an Insolvency Practitioner. An Insolvency Practitioner will use either an IVA (Individual Voluntary Arrangement) or a CVA (Company Voluntary Arrangement) to help keep your business running. This involves making an arrangement with your creditors to either pay all or some of the debt off over a period of time, usually five years. This may include selling off some properties, ending leases, etc. One of the issues with a CVA is that it's advertised, so becomes public knowledge. Other businesses become wary and any existing credit accounts could soon be replaced with proformas. But in certain circumstances, a CVA works well. The client states how much will be paid on a monthly basis, based on a realistic income and expenditure analysis.
How Can Business Rescue Help?
Another option is to contact Business Rescue. Business Rescue is a group of businessmen who’ve experienced running companies that have had difficulties. When they are contacted by a client, they ideally like to carry out a ‘business medical’. They look at all aspects of the business, find the root problems from a business point of view, review all the options available and recommend actions in the short term and long term, that are required in order to improve the direction of the company. So for example, a lack of cashflow can be a problem but what has caused this? The answer depends on the solution required in order to repair it. Unlike some other organisations, Business Rescue aren’t restricted in terms of the products they can offer and work with various other service providers to help turn businesses around ie. Finance, legal, debt management, employing new management, etc. But the client chooses and Business Rescue will work with them, building up a good relationship.
Business Rescue offer a similar product to the CVA (mentioned above) but Business Rescue negotiate with the creditors. The agreement doesn’t become public knowledge and the only parties aware of the arrangement are the creditors, the client and Business Rescue. They look to pay 100 percent of the debt off within the five years, but there's no restriction, so can extend to six or seven years. And the established supplier credit accounts are kept.
When Business Rescue are first approached for help, they generally have to take action quickly and buy some time. They will call creditors telling them of their involvement, that they’re reviewing the situation and will contact them with a plan in a month. During that month, they complete their ‘business medical’ as mentioned previously. Business Rescue once received a phone call from someone who stated they had a winding up petition, due to be heard, the following day. So they had to arrange a barrister to attend court the next day in order to at least get an adjournment while they completed their business medical.
There are many reasons why a business develops difficulties. Internal and external change is always likely so needs to be monitored and planned for. A few examples of potential problems are:
- Major customer goes bust
- Past loan has enormous interest rates
- Product Life Cycle changed – now lack of demand
- HMRC debts
- Supplier relationship is weakening
- Losing valuable staff
- Cashflow problems
One of Business Rescue’s clients runs a commercial laundry. He was subcontracting some of the work and doing hotel laundry for very major hotels. Unfortunately the subcontractor had a fire and the majority of sheets and blankets were destroyed. The subcontractor wasn’t insured, and had to replace £75,000 worth of linen for a hotel the next day. The problem wasn’t the fire, but lack of insurance. Often the essentiality of these products doesn’t become obvious until there’s a problem.
Another thing that seems obvious is having a business plan, even if it’s on one sheet of paper, with a plan of where the business is going. Most businesses don’t, and they also don’t monitor what’s going on in their business. They have no idea what their sales forecast is. They might have a historic set of accounts but they don’t use them to regularly measure the key factors, graph them or look for trends, to help identify any early warning signs.
Some small traders have started business because they may be a technician, a plumber, bricklayer etc. and that's what their skill is. The company's got bigger, but they haven't been taught management and business skills to cope with this. Small companies tend to work hard and keep going until the problem becomes too big. But any business owner needs to understand his business or understand what’s going on in his business and it’s amazing how many people don’t.
Business Rescue help businesses as much as they can and are aware of the difficulties involved, particularly for a small business owner or SME, where for example, the owner’s house might be in jeopardy, he is in fear of losing the business and may not yet have told his wife. He’s putting his future in Business Rescue’s hands so there’s a big responsibility involved. However having shown their clients direction, many retain their services as business mentors to help out in the future.
Is your business in difficulty? If you would like to find out more about how Business Rescue could help, click here.
If you’d like some business support (so you are less likely to need to call Business Rescue) please contact Mushroom by clicking here.