Watching the cash
By far the biggest reason why businesses go bust is a lack of profitability or a cash flow crisis, resulting in running out of money. This can be caused by losing a significant customer, by the bank withdrawing lending facilities, or sometimes by over-trading - where you're very successful but run out of working capital to cope with the success.
In my business, Sellerdeck, we try to cover this eventuality by producing a cashflow forecast every month. This report also predicts what would happen in a worst case scenario on sales. That way, we can see if we have any issues with the current trend, and can see how quickly a threat would emerge if things started going wrong. We also look at how accurate our previous predictions were, with a view to improving our methodology.
With this in hand, it is possible to arrange things like invoice factoring before they are actually needed. It's better to deal with a crisis before it's happened rather than once you are in the thick of it.
Preparing for disaster
I've read a few times over the years how many smaller businesses go bust not long after their main office has burnt down, and I can believe it. The interruption to service, loss of records and general disruption proves fatal to many companies.
To try to offset this, my company has all computer records backed up off site every day. We also pay an annual retainer for a disaster recovery facility that we can use if we lose the office to fire, flood or some other disaster. We have equipment and lines in place to enable us to get a service back up and running within 24 hours of a disaster. And we have a regular "dress rehearsal" to make sure it's a real, rather than a theoretical, capability.
Although it is possible to insure against business disruption, I think that preparations similar to ours are the minimum that any business should undertake. Years ago, our disaster recovery area was the front room of my flat. You're never too small to be prepared, you just need to cut the cloth to fit.
Many companies are dependent on a few key people, so it's important to hang on to them. Look at how competitive their salaries are; do you need retention payments; and develop either formal or informal succession plans, depending on your size.
If someone critical gives notice, it may be worth going to an interim management company that can quickly provide a stopgap. It could be better to have someone temporary in place who at least can get a handover, than wait for the perfect candidate who has to start totally in the dark.
The other threat is legal action relating to disputes or dismissal of employees. These can not only be expensive, but even worse can consume huge amounts of management time. We always consult an HR adviser when there is any sign whatsoever of a contentious issue. This encourages us to behave ethically in all circumstances (which we want to do anyway), and keeps us safe. As a result, we have never been taken to an industrial tribunal. It's been threatened, but because we were squeaky clean, the person doing the threatening backed off.
What to do when it all goes wrong
If there is a disaster, then these would be my top tips for recovering:
Fall-out from the turnaround
When things get better and you're out of intensive care, it's necessary to re-establish a successful company. Ironically, some key staff who stayed out of loyalty when things were bad, can decide to move on when they feel you are out of the woods.
What is important is to work out your next strategic moves and then communicate these effectively to the staff. Time is a great healer and coupled with a sense of direction and purpose, memory of a company's "near death experience" can be quickly banished to history. Good luck!
Chris Barling is CEO of E-Commerce and EPOS systems supplier, Sellerdeck. Originally published on Is4profit.