The past few years have been tough for most businesses and even highly experienced business people have suffered. Many a good business that in more prosperous times could have been successful has gone to the wall, with failure often being outside of the owner’s control.
So, when should you accept that things are not going to get better?
Unfortunately, there will not be one clear sign that tells you it’s time to pull the plug – it will be a combination of factors. The important thing is to be looking for early warning signs.
Early warning signs
The build up to failure maybe slow, with a combination of unmanaged factors leading up to the final nail in the coffin, including:
- customers taking longer to pay – a day or so each month
- stock holding increasing – meaning cash is tied up in stock that may not sell
- stock is becoming obsolete and too out of date to be sold
- worse still, stock is being damaged in the stock room because of the quantity being held
- having to sell at a loss or only just covering the cost of stock and direct costs such as delivery
- not being able to pay bills within the agreed payment terms.
By this time alarm bells should be well and truly ringing, but the key is to put effective management reporting systems in place so that each month you are checking these figures and managing things BEFORE they get out of hand.
It’s too late
Even with effective management systems in place showing the business is going off course, the emotional attachment that the owner has can mean that the warning signs are ignored. Before they know it the business is beyond recovery and it is too late.
The tell-tale signs that this may be the case are:
- needing to pump personal funds into the business to keep it afloat
- continually drawing on money set aside to pay VAT, PAYE, income tax or corporation tax
- bills mounting up that cannot be paid – in fact, envelopes remain unopened
- the bank refusing to extend your overdraft.
The writing is on the wall and in all likelihood the owner is at the end of their emotional tether. Even if a solution was available, many business owners are so stressed at this point that they are unable to function effectively.
Quitting and closing the business is probably one of the hardest business decisions anyone ever makes. The success comes when the business owner recognises that this is the best route to take and puts the steps in place to close everything down.
How do you close a business?
Closing any business that does not have debts is quite simple. If it is a sole trader or unincorporated business all you have to do is complete the accounts, file the final returns, pay outstanding taxes, inform HMRC of the closure and physically close the business down.
A limited company must take a few more steps, including advising Companies House via a special form, telling shareholders, directors and so on.
However, if a business has debts it gets more complicated and expensive to close down the business – madness given in all likelihood there will be no funds available.
When there are debts involved there is a legal process to follow and it is best to seek specific advice from a specialist who can advise the best route – especially if you operate as a sole trader or have personal guarantees on loans through a limited company.
Using 20 years’ experience spent working at some of the UK’s leading businesses, award-winning chartered accountant Elaine Clark is the founder and managing director of www.cheapaccounting.co.uk, an online accounting service aimed at small businesses with big ambitions.
There's more great advice available on the Donut business survival guide.