Being a business owner is very rewarding, but it can also have its fair share of challenges, particularly given what’s happened over the past couple of years. As we have a great deal of experience in working with struggling businesses, we often get asked what a business owner can do to try to protect themselves from needing the help of an insolvency practitioner.
In our experience, the majority of business failures fit broadly into two categories: (i) bad management and (ii) an external factor beyond the control of a business. I appreciate that it is quite simplistic to say that bad management is the root cause of most failures, but what we mean by this is the lack of planning, evaluation and understanding of a marketplace that ultimately leads to a series of events that brings about the demise of a business. For example, if a business is reliant upon a customer that represents over 50% of its turnover, it would be severely threatened if that customer went into an insolvency process or moved to an alternative supplier. The dramatic reduction in turnover could lead to the business to go into insolvency itself.
Work on the business not in the business
The above example reinforces our view that a business owner needs to regularly conduct a review of their business to identify both future opportunities and also the threats that exist. Whether that is using a simple tool such as a SWOT analysis or utilising an external advisor to assist in the process, it’s important to take a step back from the day to day running of the business and think about the medium and long term direction.
It sounds simple, but you would be surprised how infrequently this task is undertaken.
Having undertaken a review of your business, taking into account the widely reported supply chain issues across the world following the Covid pandemic, suppliers should be a critical area that require some focus. For the purposes of this blog, this is a key area we are going to focus on. Who can forget the run on toilet paper and pasta caused by a hiccup in the supermarkets supply chain. Anyone in the new car market will also know that there’s still a world shortage of chips (semiconductors).
Starting at A, the best advice we can give any company is to firstly take some time to review your supply chain. It’s imperative that you identify who the critical suppliers are. That doesn’t always mean the biggest companies. In the case of automotive suppliers, some of the smallest parts can cause the most problems (such as those semiconductors again), and typically the more complex the thing you’re making, the more complex the supply chain issue.
There is software that can assess the risks in the supply chain by mapping them out (Shipedge, Easy4Pro, Tradefact or Netsuite for instance) and assigning risk scores to each supplier. It’s probably also worth accessing whatever current financial information you can get on each supplier, and where they are vital to your business asking them for management accounts. A last minute supplier failure could bring your business to its knees.
If you’re in a position where you are able to identify alternative suppliers, then it’s worth talking to them at an early stage, just in case there are terms and conditions that you can’t or won’t want to comply with in order to trade with them. It would be well worth drawing up a list of alternative suppliers and key contacts, with a broad idea as to their financial position. Contingency is the key word here.
There are of course certain legal considerations to think about in respect of IP, and some thought will need to be given where you might be incorporating branded parts into your finished product and whether you might infringe on any rights. If you’re thinking about terminating a supply contract, make sure you get adequate legal advice to avoid a hefty damages claim.
If certain suppliers are business critical, you would be well advised to speak to them on an informal basis to make sure that they are not having problems of their own which could unexpectedly interrupt your supply. If they are themselves struggling, you could decide to pay them earlier than the contractual payment terms if it could aid their cashflow and ensure that your goods arrive on time. The supplier may be able to apply for business support grants, and you could develop a rescue plan if you suspect that your supplier is facing financial stress. Communication and honesty are the key factors here, and the earlier the better.
Our advice for all business owners facing a challenge is to seek advice at an early stage. This approach maximises the range of options available and gives the business the best chance of avoiding an insolvency process.
If after conducting your business review you have any questions about any of the issues raised here, please don’t hesitate to contact one of the BLB Advisory team.