Insolvency is a worst-case scenario for many small business owners looking to bring in outside finance. It’s something that can spell disaster for the business and those associated with it – but it’s something that can be forestalled, and ultimately prevented, if the appropriate action is taken.
Let’s look at what those actions might be, and whether they’re appropriate for your circumstances.
Focus on high-value customers
While winning over new customers is necessary if your business is going to expand, the majority of your earnings will come from a core of high-value customers. Some customers are more reliable than others; they’ll pay on time, they’ll place orders that can be fulfilled easily, and you’ll be able to lean your marketing efforts into them in order to bolster your cash flow while cutting costs elsewhere.
Call in Debts
For the sake of keeping everyone onside, you might be tempted to leave debts outstanding for weeks, or even months. After all, there’s a cost associated with chasing late payments, and the potential to cause friction which might harm your relations with problem clients. But if cash flow problems are arising as a result of late payments, then your company stands at increased risk of putting itself into compulsory liquidation.
Excess spending is obviously going to limit your company’s profitability, and make insolvency more likely. Knowing exactly which pieces of spending are essential to a company’s prosperity in the future, and which are frivolous and excessive, is what separates quality leadership from everyone else. You may have to be ruthless, and restructure in places where you’ve invested a great deal emotionally, and financially. If you can restructure with the aid of a trusted outside party, then you might have an easier time.
Incentivise fast payment
The easiest way to get customers to pay quickly is to offer them a financial incentive to do so. Offering discounts might seem like a dangerous thing to do when your business is at a precarious moment – so make sure that you calculate your discount precisely. This often means knowing exactly how much money you can afford to lose. Bear in mind that it’s better to have 80% of something than 100% of nothing.
Borrow your way out
It might be that you can restructure your debts to make them more manageable, and to obtain the extra liquidity you need to satisfy employees, suppliers and anyone else who might expect payment from you.