Blog
Steer clear of bankruptcy by identifying business problems in advance
Entrepreneurs need to be aware of key financial indicators and monitor them monthly.
Going bankrupt is one of the biggest fears that entrepreneurs have. Statistics show that last year alone, more than 2,000 Finnish companies ended up insolvent. To stay in business, a company should tackle problems before they escalate.
According to Harry Nordström, Head of Financial Management Services at Administer, financial planning and monitoring are crucial for small business owners and corporate management alike.
“Risks are significantly greater if you don’t have a solid plan in place – if you are only guided by your gut feeling and take it one day at a time without even monitoring the progress of your business,” says Nordström.
Regardless of the level of planning, the first signs of trouble are fading sales and the failure to find ideas to remedy the situation. If the solution is to drop prices, the company will face reduced profitability and shrinking margins.
“Pretty soon the business will be in the red with the equity ratio going downhill. If the company was not in a tip-top shape to begin with, cash flow and liquidity problems can quickly escalate,” says Nordström.
If the situation extends and bills keep stacking up, stakeholders will react. For example, suppliers will stop deliveries or demand advance payment. Any tax debt may disqualify the company from public procurements.
Get a grip of your financial indicators
In small businesses, it’s often up to the entrepreneur alone to monitor the finances – a crucial task that should not be overlooked. Key financial figures should be checked every single month.
Key figures include profit and loss account and sales figures as well as cash flow. As an entrepreneur, you need to keep track of the current amount of cash on your account, the incoming amount in the near future and the amount reserved for payments.
“The amount of available cash should be monitored regularly. If management is daily checking whom they can pay and how much, things are about to get out of hand,” says Nordström.
This is final call for cutting costs. Nordström’s advice is to take a look at the big picture: should you close down or sell some operations, or can you find a way to make them more profitable?
“At the end of the day, you need to validate that the product or service you offer is what the market wants. If not, no amount of cost-cutting will help.”
In some cases, it can be beneficial to acquire cash by selling large unpaid sales invoices or by factoring, that is, selling all accounts receivable.
Your accounting service provider can help you find the right solutions for your business’s needs. And if monitoring your financial figures seems burdensome, help is always available.
“Monitoring your numbers is nothing to lose your sleep over. Administer has a wide variety of tools for monitoring and interpreting financial figures. Your contact at Administer is familiar with your company’s figures and is happy to clarify their meaning. Historical data of the key financial figures give us a clear picture of where the company is headed at any given moment,” says Nordström.
Know your market and where it’s going
Massive problems are often the result of small concerns piling up, and it’s not always a question of business management.
“Sometimes the company’s problems may stem from the operational environment. It’s relatively hard for a company to prepare for unexpected global changes. I’ve witnessed situations where businesses have run into trouble on quite a short notice due to external events or trends,” says Nordström.
Business impacting global turns might include customs duty increases, volatile exchange rates and trade sanctions. Drastic political decisions may significantly impede business operations in specific markets. Preparing for such risks is important especially for import and export businesses.
Nordström urges businesses to constantly monitor and analyse the market and the competition. Agile companies are best equipped to respond to the changing environment.
“If you stick to the old ways, you’ll find yourself in trouble sooner or later. There are plenty of examples, even among gigantic global enterprises.”
Key points to consider
- Planning is key! Businesses that fail to plan, plan to fail.
- Monitor the status of your business constantly. Not just sales, but also equity ratio and liquidity.
- Keep an eye on the market. Does your company have the right service or product to match the demand? Markets and demand evolve, so stay alert and identify the risks in advance!
- Get your pricing right. Selling price and profit margin must be spot on. Otherwise, any remedies will only bring temporary relief.
- Take corrective steps before problems escalate!