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Keeping Your Business Afloat: Practical Tips to Prevent Insolvency

Photo of a ship sinking into the ocean, with people escaping on lifeboats

Are you staying afloat? The steps below will help you steer the ship forwards and create a thriving business.

We all know that running a business comes with its fair share of challenges.

In the latest business statistics (Feb 2023), 63,192 businesses have ‘died’ this year, and 99% of these businesses have 0-5 employees. That is a lot of people who took a chance to realise their dream of being their own boss and somewhere along the line it went wrong. So, what can you do to ensure that you small business thrives?

In this blog, I will explore some practical and positive tips that can help you safeguard your business against insolvency.

What is insolvency?

Let's start by demystifying the term "insolvency." Simply put, it occurs when a business cannot meet its financial obligations, and the value of its assets is less than the total debts owed.

It’s like trying to fit a square peg into a round hole - it just doesn’t work. Understanding this concept is crucial because it lays the foundation for the preventive steps we'll discuss.

Practical steps to prevent insolvency

1. Financial management

Effective financial management is the cornerstone of a successful business. This applies to both you personally and your business.

Create a personal budget that outlines your income and expenses clearly. How much do you need from the business to pay your personal bills? Can your business sustain this amount?

In the first five years of business, a good rule is to limit your wages to what profit you can generate personally in your business and/or what you could earn if you were an employee. Treat anything above this as a bonus. This means that if the business has to downsize, you are confident that you can generate the income you need personally. Too often I see business owners rely on an income of $180k per annum because times are good, but when hard times hit, the business can’t sustain this nor could they earn this if they were to try and get a job.

Next, create a business budget that outlines the businesses sales and expenses clearly – make sure to validate each and every line so that you understand exactly how you will create income and what costs you will incur. Also make sure that you include your wages as a business expense – this is critical to ensure that the business can sustain this cost. After all, if you weren’t doing the work, you would have to pay someone else to do it. More often than not, business owners work for free, but this is false economy and not a sustainable business.

Does your budget show a net profit? It must!

Each month compare your budget to your actual – do this for both your personal and business budgets. Where there is a variance, make sure you understand why! And if action is needed, take it!

Savings – make sure that you put money aside for tax each week or month. If you are unsure how much to put aside, ask your accountant for guidance.

Identify 3-5 key performance indicators that you look at each month. These need to be easy to calculate and are the first sign that things aren’t right. This might be:

  • Making sure all your customers have paid on time;

  • That your % of wages to sales is where you expect it to be (a higher % might indicate productivity or rework issues);

  • That your % of purchases to sales is where you expect it to be (a higher % might indicate stock holding or supplier price increases that you have not passed on);

  • Looking at the stock on your shelves – is there too much or too little?

  • Are there a lot of unfinished jobs that you haven’t been able to invoice for?

Financial management doesn’t need to be scary or complicated, but it needs to be done. Seek help if this is not your strength.

2. Debt

While borrowing isn’t inherently bad, it should be done responsibly. Personally, I don’t think you should borrow money for anything other than assets that generate income. And you should always make sure that your business can afford the loan repayments. Negotiate favourable terms and ensure you understand the interest rates and repayment schedules.

Pay your creditors on time – if you can’t do this then you have cashflow problems and you need to take immediate action to change this.

3. Diversifying Revenue Streams

Relying on a single revenue stream is like putting all your eggs in one basket. Explore opportunities to diversify your income sources.

Can you introduce a new product or service? Is there an untapped customer segment waiting to be catered to? Diversification can create a safety net for your business.

4. Customer Relationship Management 

Customers are the heart and soul of any business.

Treat them well, and they'll keep coming back, bringing their friends along. Build strong relationships by providing excellent service, addressing concerns promptly, and going the extra mile. Satisfied customers not only boost your revenue but also act as your brand ambassadors, attracting more business your way.

5. You do NOT have to do it alone!

Running a business can be overwhelming, and it's okay to seek help. Seeking professional advice can be a game-changer. Don't hesitate to reach out when you need assistance.

Remember, every successful entrepreneur faced challenges, but they overcame them with determination and smart strategies. Your business is no exception. Embrace these tips, stay positive, and watch your business thrive, even in the face of adversity. Here’s to a bright and prosperous future for your business!