Staying Afloat: How to Stop a Sinking Company

Stop a company going into insolvency

This is an enormous topic but it’s one which is critically important to be covered properly, so we will do everything we can to convey the most important information in a concise and usable way.

The first point is that if you’re reading this article, you have already made a huge step. That is, actually recognising your business is at risk and trying to do something about it. A lot of business owners bury their heads in the sand until it’s too late. Confronting this issue is going to be stressful as so much is on the line, but it’s essential if you want to give your business the very best chance.

There are also legal issues that impact this topic, with directors of insolvent businesses that continue to trade and rack up further debts potentially liable for all or part of the company’s debts. But that warrants a post of its own. For now, we’ll concentrate on a few approaches you can take to dig your struggling company out of a financial hole…

Identify the source of the problem

This is the single most important point in this whole post. If you can’t find the root of the problem, it’s going to be impossible to solve it. And unfortunately, finding the cause(s) of a failing business is a huge challenge in itself.

Objectivity is a difficult thing to achieve. To get a more balanced view of the issues facing the company, you should call a meeting of the directors and senior managers of the business who will all have their own views.

You should also think back to a time when everything at the company was good – sales and profits were strong, customers were happy and employees were productive. What has changed since that point? It could be a wide variety of things, such as:

  • New competitors have entered the market
  • You have diversified your offering
  • You have taken on new staff
  • You have increased your prices
  • You have changed the product
  • There have been innovations in the market
  • You’ve changed supplier
  • There have been changes in the economy which mean customers have less money to spend
    And many more besides…

If you can narrow down the reasons for the company’s struggles to a few likely candidates then you’ll put yourself in an excellent position to actually do something about it.

Change your offering

Few businesses that do everything they can to meet their customers’ needs will fail. In many cases, businesses become stale. After an initial period of success, they rest on their laurels and assume the sales are here to stay. But during that time, new competitors arrive offering bigger, better, cheaper or cleverer products and your business gets left behind.

If your sales continue growing and are not the source of the problem then you have a really good chance of saving your business by making a few changes elsewhere. However, if sales are dwindling then you have a huge problem.

Talking to your customers will help you find out why sales are falling and give you the insight you need to change your offering to reflect their wants and needs. It could be that customers are increasingly using their smartphones to buy the products or services you offer, and you don’t have a mobile-friendly website.

Alternatively, it could be that a new competitor has arrived on the scene and is selling the same goods and services at a lower price. Carrying out some competitor research will help you discover whether your competitors are doing something you’re not.

Invest in your marketing

Are enough prospective customers aware of your offering? If you’re not the type of business that has a high proportion of repeat customers then you need to constantly generate new business and that requires investment.

One of the most cost-effective forms of marketing is direct email, which is a cheap way to reach out to new markets quickly and easily. This can suit businesses with almost non-existent advertising budgets. If you have a bit more money to spend then paid ads on Google and social media platforms and geographically targeted offers through websites like Groupon can help you reach new customers in a hurry. Here are a few things to bear in mind when marketing your small business.

Revert to your core business

This is certainly not a simple fix for a struggling business but it may be one that has to take place. As businesses grow, they very often diversify away from what it was that made them so successful in the first place. In doing so, they can lose the competitive advantage they had, whether that’s expertise or the uniqueness of their products and services.

They also take on more costs as they need new personnel, machinery and equipment to create the new products and services and will be competing with established businesses in the new market. As a result, profit margins can take a hit. In diversifying, many businesses also leave their core business undefended.

Even experienced and sophisticated directors make mistakes when identifying new growth opportunities. They think they are moving into highly related businesses, but find there are differences in the new customer base or cost structure that make life difficult. Unfortunately, reverting to a core business can be painful, with staff having to be laid off. However, that pain will be for the greater good if it leads to the survival of your business.

Refinance

If you have reached your maximum borrowing limit on a business credit card and overdraft and cannot borrow any more money without giving a personal guarantee, it’s time to reconsider your options.

For a struggling business, taking on more debt is not necessarily a good idea unless you can spend it in a way that will lead to a quick increase in income that will outweigh the cost of the debt. However, there are a number of alternative funding options which may provide the capital you need without taking on more debt.

For example, invoice finance providers effectively buy your invoices for an advance fee worth up to 90 percent of the invoice within 24 hours of it being issued to a customer. They then pay you the balance of the invoice, minus their fee, once the invoice is paid. This can reduce the problems caused by late payments in many businesses and give an instant boost to cash-flow.

Another potential finance option you may wish to consider is turnaround finance. If your business is viable apart from the problems it is currently experiencing, this type of finance can provide the quick cash injection you need. This type of funding is not free from costs and investors will want to see a viable business plan, a history of cash-flow and a long-term plan for the business’s recovery.

Renegotiate your debts

If your business is struggling with its debts, there are a number of different options you have that can help to make debt repayments more manageable. If you have tax bills you are unable to pay then you might be able to reach a ‘Time to Pay’ arrangement with HMRC. If you can, this will allow you to spread payments owing to HMRC over time, usually one year, to make them more manageable and reduce the immediate impact on your business. It will also allow you to avoid the penalties you would otherwise be charged.

A company voluntary arrangement (CVA) is another option you may wish to explore. This is a legally binding agreement between your company and its creditors that allows for the full or part payment of your debts over a period of one to five years. As well as reducing your debt repayments in the short term, it also prevents creditors taking any legal action against you and stops interest charges being added to your debts.

If the business is insolvent i.e. it cannot pay its debts when they fall due, and it has already received a Statutory Demand or a County Court Judgement (CCJ), then a company administration could prevent the company from being wound up by its creditors and give you the time you need to restructure.

With that said, a company administration is not for everyone as you will have to relinquish the control of your business to a third-party insolvency practitioner and you will also have to pay their fees.

Final thoughts

Not every business is worth fighting for. If you can no longer afford to pay your employees, face daily creditor pressure and have been dropped by major customers then it might be time to call it a day. However, if you have been successful and believe you could be again, we hope these six strategies to keep your business afloat will provide you, at the very least, with some serious food for thought.

By Simon Renshaw, Director at AABRS.