Every good business owner should learn how to spot the early warning signs of distress and know how to turn things around.

In every business, there are moments of ups and downs. Even when you have a good week of strong sales, chances are, you may still keep a lookout for early signs of distress unconsciously. Having the ability to handle business crises and turn things around is an essential part of managing your small business effectively. In this article, our small business accountants look at some common signs of distress and discuss what you can do to turn things around.

Common signs of business distress

Business distress can stem from internal or external. Here are a few common internal signs of business distress:

  • You don’t have enough cash to meet obligations
  • Your clients don’t pay on time
  • Your stocks aren’t selling
  • You miss forecasts
  • Your profit margin is shrinking
  • Your customer base is shrinking
  • Your suppliers don’t want to work with you due to unpaid invoices
  • Your return of investment is making a loss
  • Your staff turnover is high

Changes in the external environment can also affect your business and the distress can include but not limited to:

  • Changes in government policies
  • New threats from competitors
  • Changes in consumer behaviour
  • Saturated demand
  • Weak economic conditions

Five short-term recovery measures that address a business crisis

When your small business experiences signs of distress, the first thing you should look at is how much cash you have, as well as if your cash flow forecast is accurate (or not). If your cash level is low and your cash flow forecast foretells a dire situation, then your short-term options may be:

1. Cost cutting

You aim to cut costs and expenses immediately in order to reverse poor performance. This may include reducing headcount or terminating non-essential staff benefits.

2. Disposal of assets

Selling inventory at a discount or selling other liquid assets to free up cash quickly.

3. Borrow

In some instances, you may need to borrow money to stabilise the business.

4. Identify quick wins

Quick wins refer to any methods that can lower your costs and improve your cash situation immediately. An example is terminating less profitable products with immediate effect.

5. Seek help from your accountants

Your accountants should not be someone whom you meet once a year. Ideally, they should be working alongside you regularly and have the foresight to prevent any capital or financial distress from happening at the very first place. If you are facing a business crisis and receiving no help from your accountant, then it is time to switch to a qualified chartered accountant who champions small businesses like one of our small business accountants here at Tax Agility.

Seven long-term recovery measures that address a business crisis

The above-mentioned short-term solutions work to tide your business over temporarily. Do not let your guard down once your business is stabilised. Instead, continue to work with your accountants to improve business efficiency. An efficient business works effortlessly to convert all the available resources to maximise output, which in turn will deliver better products or services, increase sales, enhance customer experience, and promote a happier working environment.

To achieve optimal efficiency, you may initiate some of the following tasks so your business is prepared to weather the next crisis.

1. Costs control

If you are trading actively, chances are, your costs usually go up and not down, unless you make a conscious effort to control them wisely. Reducing expenditures that are not tax-deductible, renegotiating contracts with suppliers, lowering your tax obligations legitimately with the help of a reputable accountant are some examples of costs control.

2. Make use of cash flow forecasts

Cash is king and it is one vital resource that can buffer your business against sudden changes. Cash is what your business has at any moment in time. A close relative of cash is cash flow, the net change between your cash inflows and outflows for a given period.

An indication of your company’s health, cash flow statements consist of three parts: cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. A simplified example is to calculate expected cash receipts from customers in a given period. Ideally, they should be more than enough to cover your bills in the same period, plus some remaining cash which you can use to reinvest into the business or set aside as a rainy day fund.

Positive cash flow does not happen accidentally. It is achieved through careful planning and sound financial management. Your accountants should also provide you with cash flow forecasts; use them wisely to make informed business decisions. If you would like to improve your cash flow, follow the link to this post five ways to improve your company’s cash flow.

3. Generate new revenue

Launching new or complementary products, creating additional services, expanding online, increasing the number of customers are examples which can help your business to generate more business and revenue. Other ways to increase revenue may include selling your products/ services at a higher price, as well as increasing the average transaction amount. One controversial approach is to sell more to your existing customer base – this may work temporarily but it is unlikely to sustain over a longer period.

4. Reorganisation

If you find yourself questioning the ability of some staff but praising some others after a crisis, you aren’t alone. Many business leaders achieve successful turnarounds by reorganising roles and changing a few people. While there is no fixed formula, a useful guide is to keep only employees who are essential to the business, outsource when necessary and use contractors or temps to ease the workload during busy periods. This lean structure promotes well-defined and fulfilling roles, and it potentially can save you a significant amount of money too.

5. Improve operational process

Streamlining communications, eliminating paperwork, introducing appropriate technology (like using Xero, affordable cloud accounting software that is built for small business owners) are some examples that can increase productivity instantly.

6. Create a value proposition

Competing on price alone can only get you so far, but once you give your customers and potential customers an attractive reason (other than price) to buy from you, chances are, your customer base will increase organically. As a small business owner, you can increase your value by providing exceptional customer service, collaborating with synergetic businesses, offering convenience to your customers, to name but a few.

7. Prepare for the next crisis

You cannot prevent crises from happening, but you can certainly minimise their impact. Internal crises like shrinking profit margin and negative cash flow can be mitigated with good planning. If your accountants offer small business management consulting service, consider using it because you want experts working to improve your business finances for you.

Stress test your business

Stress testing involves making assumptions and analysing how your business responds in each scenario. Ideally, the results should allow you to identify scenarios that will impact your small business the most (both positively and negatively), what are the potential challenges as well as new opportunities.

As every business is unique, there isn’t a one-size-fits-all stress test or formula. Here is a quick example: assuming you are a small business selling floor tiles to consumers, you may test your business with these questions:

  • What if you lose every one of your suppliers? How long can your business go on without new inventory?
  • What if tiles are out of fashion?
  • What if sales have tripled, will your revenue triple too?

Ultimately, stress test allows you to develop plans that can reduce the impact on your business should an undesirable factor hits, as well as increasing your business opportunities should an extremely favourable factor were to come.

Tax Agility can help small business owners through crises

Every business exists to make money and ideally, you should have full confidence that your business can grow and achieve the success you desire. In reality though, managing a business requires more than sheer hard work. You are required to have sound business acumen, know how to manage people, excel at sales, even know a few accounting rules, among the many subjects needed to overcome distress and run a successful business.

Not every business owner has all the expertise required, nor has the resources to hire full-time specialists. This is why working with independent specialists is often a cost-effective approach.

Take our small business accountants for instance. We are qualified, trusted, and have years of solid experience helping small businesses in London, Richmond and Putney to thrive in good time and bad. We do this by crunching numbers and setting financial disciplines that are unique to your business. With us working alongside you, you know you are in good hands.

If you would like to know how Tax Agility can help your business and develop recovery measures at the first warning signs of distress, speak to one of our small business accountants today by calling 020 8108 0090 or filling in our online form.


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This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.