Doing business 2023: spending continues to tighten

The challenges of running a successful business in the UK look set to continue, with the number of distressed companies predicted to increase in the next 18-24 months, according to the Institute for Turnaround.

Retail, automotive and casual dining industries have been highlighted as ‘likely’ to be affected during this time, as consumer spending continues to tighten due to high costs of living, inflation and energy prices.

This forecast represents new challenges for businesses and their directors, who have already struggled through the difficulties that came with the pandemic, a national energy crisis, war in Ukraine, and supply chain issues. It is fair to say that many business models have been tested to their limits, and these events have emphasised the importance of maintaining a focus on the financial resilience, diversity, and flexibility of a business. Here we consider what warning signs business owners should be looking out for.

Foreseeing trouble

As businesses move through different stages of the corporate lifecycle, they can experience a financial decline due to problems such as lumpy or inadequate cash flow, poor cost control or a change in demand for their goods and products. This can happen either early on, when a business is growing and is hungry for cash to fund that growth; or equally to mature businesses that may have failed to adapt and are experiencing a decline in success. Either way, if a business does not act fast to address these issues, it may find itself financially stressed, distressed or potentially insolvent. The early warning signs can sometimes be subtle and hard to spot – for example a drop off in sales or profit margin, loss of good staff to competitors or a tightening of credit lines. These may not cause too much alarm looked at in isolation but taken together, these sorts of issues can point to trouble ahead.

Of course, turning a business around can be difficult to achieve, especially against the backdrop of external factors, and not everyone is able to steady the ship, meaning further (external) support is required in order to ensure recovery. As the steward of a business, be that an owner, director, or board member, foreseeing these challenges and understanding what action to take, and when, is key to navigating them and minimising business disruption.

Taking action

The decline of a business from profitable to insolvent is seldom immediate – more often there are opportunities when good choices may stop or reverse the decline, and poor choices, or simply inaction, may accelerate it. If management are too slow to respond, they may quickly find themselves in crisis mode, firefighting competing demands from creditors, customers and stakeholders. If these groups start to lose confidence in management, the situation can quickly spiral out of control, as customers take away business, credit lines are withdrawn, and banking facilities tighten. In those circumstances, short-term cash management becomes critical to survival. It is in these sorts of situations that it is so vital that directors take professional advice, as making poor payment decisions and worsening the overall creditor position can potentially create personal liability for directors.

Taking action and seeking professional advice from turnaround specialists at an early stage provides more options for businesses to explore. Sometimes businesses are reluctant to admit or recognise the challenges that they are facing but doing so can minimise those problems much more quickly than hoping for the situation to improve. Actioning this support early has the potential to transform a business’s outlook, potentially saving jobs, protecting value and alleviating personal stress and concern for directors.

Support strategies

In the current trading environment, management teams need to focus on recognising the early red flags of underperformance and acting fast to address them. Businesses can address any concerns they have regarding performance in a challenging marketplace by ensuring its directors or owners reach out for support at the earliest stage possible.

It is important to remember that when a business faces such challenges, the responsibility to respond lies with its owners, directors or board members. Seeking professional support in order to help navigate the complex legal and regulatory structure must be seen as a priority as any consequences or mistakes, however innocent, can be severe and in some instances, personal for those in charge.