A company will inevitably face ups and downs during its lifetime – it’s a fact of business life.
If you can’t pay your bills or make payroll, then your financial situation can quickly slip into intensive care.
These situations rarely work themselves out, and it’s essential to act quickly – businesses that are left to drift in financial turmoil don’t suddenly right themselves.
Here are some examples of the action you can take – starting with the most pressing.
1. Cut costs
You need to face the fact that to balance the books, revenue needs to go up, or costs need to go down – or more likely a combination of the both.
In the first instance, to remain in business, you will likely need to cut costs first.
Start with the discretionary expenses – for example, the staff summer barbecue will need to be put on hold.
Then scrutinise the regular outgoings. Perhaps you’re spending more than you had thought on utility bills? You could look at your company’s energy efficiency and investigate whether other providers might offer cheaper solutions. Is it possible to reduce the amount you pay for travel costs or utilities? Perhaps your landlord might consider reducing rent, for a period at least, if the alternative is an empty space since you are insolvent?
One unfortunate by-product of cutting costs may involve getting rid of some of your employees, reducing their work hours, or cutting down compensation.
However, remember that it’s better to keep your company running with fewer employees than allowing all your employees to lose their jobs if and when the business shuts down.
2. Plan your cash flow
Cash flow is the net amount of money being transferred in and out of a business.
After prioritising your outgoings, it’s essential to create a comprehensive cash flow plan that shows who you will pay, how much you will pay them, and when you will pay them.
Cash flow forecasts are crucial for any new company. Your accountant should compile these for you, and the further ahead you can plan, the more accurate your cash flow forecasting will be.
3. Take a long, hard look at your products and services
When you properly analyse them, do the products and services you offer bring in more money than the cost of delivering them? If not, they either start making a more significant contribution, or you need to stop offering them.
Do this for every product or service, and if you discover a negative contribution, you should increase the price of that service or product, cut down the cost of offering it or put an end to it.
If your business is struggling to pay its bills, now is not the time for loss leaders.
4. Prioritise your payables
If you owe more than the cash you have available, it’s crucial to prioritise who and what to pay first. Prioritise your payables in the following order:
First, pay any obligations that are capable of shutting down your business if you don’t pay them. For example, if you’re unable to pay your employees, they may decide to leave and look for another employer capable of paying them.
If this happens and you cannot deliver your service or product, you will not be able to run your company. Therefore, paying your employees is a top priority, as is thinking about the vendors who supply you with the materials you need to operate.
Next, prioritise items that will lead to significant penalties. For instance, not paying taxes on time attracts can result in having to pay huge fines. Make sure you avoid this if possible.
Any late payments should be next in line, and, lastly, should be payments that are not yet late.
5. Don’t ignore your creditors
When you owe money you can’t pay, you may be tempted to ignore the situation and hide. This is one of the biggest mistakes you can make.
Instead, contact your creditors and inform them of the situation, as well as outline your plans to settle the money you owe. Most creditors will still be willing to work with you if they believe you will eventually pay them what you owe.
If you owe money to a bank and cannot keep your payments, don’t go missing. Remember, your banker is primarily interested in being repaid.
The bank will likely only call your loan in if it assesses that the possibility of being repaid is very slim. However, if you approach your banker proactively with an excellent plan to turn your financial situation around and settle your loan, they will be more likely to work with you.
If you would like some more advice, contact the Future Strategy team today.