Wednesday, February 1, 2012

Entrepreneurs - Are You Ready for the Unexpected?

The number of companies failing continues to rise due to various reasons. In a day to day business there are lot's of good progress happens. At the same time there are some unforeseen or unexpected things turn on the face. When such unexpected things popping up, the most important thing to remember is be confident.

To start a business, you have to be confident; many entrepreneurs are driven, motivated and extrovert people. For them, risk is something to be relished or even totally ignored.

The challenge is to understand, the earlier the better, that you need help, specifically in cash flow management. Many entrepreneurs will admit a form of fiscal dyslexia; their eyes glaze over when confronted with a spreadsheet, even if they have a full or part-time finance expert as part of their team.

A good exercise is to re-examine your management accounts and put in the assumption that 25% of your predicted revenue just goes away and your largest customer suddenly decides to buy from one of your most aggressive competitors. Then assume your biggest suppliers will no longer be so flexible on payment and look at the 'spikes' in your cash flow, the times when payroll and taxes have to be paid.

Dealing with creditors/investors is one challenge, but when an impending tax demand puts the company payroll at risk, disaster may not be far away.

For example, there is a big order that has been on the horizon for some time. When this fails to materialize, optimism turns instantly to despair; In those cases, it is possible to renegotiate the terms of your lease. Landlords commonly ask for a year's rent in advance, terms you were willing to accept just after that funding round. Your moving to a monthly payment scheme will have a radical effect on your cash-flow and may even save your company, avoiding defaulting on your lease, which is, of course, your landlord's worst nightmare.

This approach is based on a sensible dialogue with both parties' interests at heart and can be extended to all your creditors. This includes your suppliers, the bank and even the tax authorities, who can be very reasonable if you approach them correctly. But any negotiation should be done on your behalf by people, who have not only made an honest appraisal of your business, but also speak the language of finance that your creditors understand.

Ideally, a company rescue is done in good time to prevent, rather than just treat the disease. If the patient is not quite terminal, then there are other steps before liquidation receivership or administration, including the Company Voluntary Arrangement (CVA). This could be a deal between the company and its creditors to repay them from future profits or by selling some of the assets of the business.

In this situation the directors remain in control of the company, personal guarantees do not usually get called in and it gives the business a fighting chance to survive. This stops pressure from tax, VAT and PAYE while the CVA is prepared, and you can potentially use the instrument to terminate employment contracts, leases, onerous supply contracts and even landlords leases if this is what is required to restructure the company into profitability. Even the sensible approach of a CVA can be a mortal blow for the confidence of an entrepreneur, who almost invariably started their company with the best of intentions. The aim should be to exit the process with not just some self-respect, but also your family home, marriage and sanity intact.


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