Balancing the challenges of running a business with the need to generate income can be one of the most difficult aspects of business ownership. These challenges have been even more severe during the Coronavirus Pandemic with ever shifting legislation and restrictions, and the relocation of many employees from trading premises to their own homes.

As a consequence many businesses are facing difficulties and the path to recovery may not be apparent. The following article looks at ten steps business owners can take to mitigate the possibility of needing to rescue their business, and what to do if their business needs rescuing.

Step 1: Management information

The first step towards rescuing a business is identifying the problems it has. The easiest way to achieve this is to have quality management information which can demonstrate immediately what targets have been reached and what targets are being missed. It is therefore important that the company has systems in place to provide that information.

Questions to ask about your systems might include:

• Do you have software or an online portal to track your business’s day to day performance?
• Do you maintain an aged debtor ledger to monitor client payments?
• Do you have HR systems to monitor employee productivity, particularly with the rise of remote working?

Step 2: Profitability

Once you have your management information in place, the next step is to determine the profitability of the business. The two factors that determine profitability are revenue and costs. You want to ensure revenues are being maximised and costs minimised.

Revenues

Questions to ask about increasing your revenue might include:

• Can we raise prices?
• Are there new routes to market that we can pursue?
• Can we sell through our website?
• Can our customers and clients find, evaluate, and engage with us on social media?
• Do we know the return on investment of our marketing expenditure and are we maximising it?
• Can we improve our product and services offering?
• Do we have a CRM system and is it being used to maximise return on investment?

Costs

Questions to ask about reducing your costs might include:

• Is the size of the workforce matched to the level of output that the business currently needs to produce?
• Processes be changed or improved to reduce the number of hours of staff input required?
• Are redundancies required?
• Can premises costs be reduced or removed?
• Have all other costs been considered as to whether they are still necessary or can be delivered in a better and more cost-effective way?

Step 3: Liquidity

Having considered the business management information and profitability, the next thing to consider is its liquidity as ultimately this is required to settle obligations, invest in systems and talent and of course remunerate the business owners.

Questions to ask about the business liquidity level might include:

• Does the business have a financial model that links the forecast profit and loss account, balance sheet and working capital requirements?
• Does the business have sufficient liquidity to meet all taxes as and when they fall due?
• Is the business up to date with payments to its trade suppliers?
• Will the business be able to generate sufficient cash to repay its borrowings as well as its day-to-day costs?
• A business is insolvent if it cannot meet its liabilities as they fall due. It is insolvent on a balance sheet basis if its liabilities exceed its assets.

Step 4: Risk coverage

Next you should consider what coverage and policies you have put in place. Many of these policies will be the usual policies required to trade, but have you gone further and sought insurance against bad debts? If not, should you? If yes, have you claimed for bad debts?

Questions to consider about your risk coverage might include:

• What policies does the business have?
• What policies does the business need?
• Do I require further coverage e.g. against product liability claims?
• Should I be reducing my coverage?
• Are there claims I am entitled to that I should bring?

Step 5: Business partners

Most businesses will have partners it works with, such as accountants, solicitors, insurance brokers, customers under contract and so forth. Periodically reviewing these partners is crucial to ensuring both best value and best quality of advice.

Questions to consider about your business partners might include:

• Have you utilised financial monitoring / credit check products to ensure your customers can pay you for work undertaken?
• Do your professional advisors have the right experience and knowledge for the sector? For example, does your accountant have knowledge of sector specific tax relief you may be entitled to?
• If you need specific niche advice, do your advisors have access to suitable experts in their network to refer you to?
• Do you review your terms of engagement to ensure best value? Have costs increased but service levels have plateaued?
• Have you considered the credit terms you have agreed with your customers / suppliers and are there any risks to be mitigated?

Step 6: Creditor pressure

The main driver of business failure is pressure from creditors over outstanding invoices or contractual liabilities, which can ultimately lead to County Court Judgements, High Court Enforcement Officer action and the presentation of a Winding Up Petition?

Questions to consider about your credit levels might include:

• Do you have adequate procedures in place to ensure that employees report possible creditors claims to you in a timely manner?
• Do you have adequate systems in place to measure how much and how long a debt has been outstanding?
• Are you justified in not paying the debt and have you taken appropriate steps and advice to ensure the reasons for disputing the debt are documented before any creditor recovery action is issued.

Step 7: Enter into dialogue

It will also assist if you communicate proactively with key stakeholders, e.g. landlords, employees and  particularly your creditors with a view to those parties understanding the position of your business and your ability to pay and therefore an agreement regarding a schedule of payments.

Discussion topics to consider might include:

• What are your intentions with regards to settling debts and can these be agreed with creditors?
• What do you need from your suppliers to improve their services? What do they need from you?
• What can you do for your employees to improve their output? What do you need from them?

Step 8: Make changes

Having taken the following steps, you will likely have identified changes you need to make to your business to improve its performance. At this stage it is important to ensure you implement these changes. It may not be practical to implement all the changes simultaneously, so develop a plan for implementation, prioritise the changes to be made focusing first on those that will yield the most benefit, delegate the work where possible, and ensure that the changes are executed.

Step 9: Is external help required?

Having considered the foregoing, the owners will be better able to assess whether or not they can fix the business themselves, or whether they need assistance from their trusted external advisors.

It may be that the business appears to be insolvent, if so they need to instruct an Insolvency Practitioner to advise on the appropriate process to help them rescue or close the business. Where external advice, and particular insolvency advice, is required, it is important to seek advice swiftly to maximise the prospect of rescuing the business. It is also important to seek insolvency advice directly from a licensed insolvency practitioner to ensure that the business does not fall victim to receiving poor advice at a critical time.

Step 10: Restructuring procedures

If the business is insolvent the actions suggested above will help the instructed Insolvency Practitioner to advise on the options available to the owners. The Insolvency Practitioner will explore a myriad of options, both formal and informal with the business owners to establish if a recovery is possible and advise on which route(s) are viable for the rescue of the business.

Where a formal process is recommended the insolvency practitioner will also highlight areas of risk to the business owners themselves and direct them to appropriate professionals to advise them independently on their own position.

Conclusion

Much of the foregoing applies equally to a successful business as it does to those in distress. By taking these steps even in healthy businesses owners will mitigate current and future risks.

For distressed business early engagement with the problems identified will reduce the need for a formal insolvency procedure and, where a formal procedure cannot be avoided, maximise the potential for it be used as part of a restructuring process as opposed to the winding down of the business’s affairs.