How To Monitor Your Business And Keep It Safe: Planning, Capital Requirements and Gearing
Managing and monitoring a business is always a difficult task, from market influences to staffing issues, keeping one’s business on track to succeed and grow is a true balancing act.
Sometimes, however, despite best efforts, things don’t go to plan and the balance tips towards uncertainty for the business. It is essential therefore for early warning signs to be recognised and acted upon.
Usually business owners, especially those that maintain close links to good quality external advisers, will spot the symptoms themselves and take early corrective action. It only becomes a problem when any issues are not noticed or, even worse, ignored and that symptom turns into a potentially fatal illness for the business.
We will be highlighting the triggers to watch out for in a series of news items to be published over the coming months.
The fifth in our series we look at planning and forecasting, capital requirements and gearing.
Planning and forecasting
Wild and optimistic forecasting of future growth conditions is a recurring feature of business failures.
All corporate planning should be scrutinised for:
- Accuracy of the information base
- Sensitivity Analysis carried out
The sensitivity analysis is particularly important because the market will never perform exactly as predicted and the company needs to know how far out it’s forecast can be before it hits real problems.
The planning function is necessary for a business to forecast its capital needs.
A business will fail if it runs out of money and it is irrelevant that a new project could have been a commercial success if seen through to completion if the money runs out first.
It is a warning sign therefore if a company has embarked on a project without organising all the funding it will need through to completion, including some reserve for overruns.
Similarly, it is a warning sign if the company is content to soldier on with an old product while it is profitable and ignore the investment that will be required for the future in order to stay competitive.
Capital structure and gearing
High gearing has long been recognised as a warning sign of impending failure because a high-geared company is inherently more sensitive to a drop in profitability.
Of the 45 major company failures featuring in a recent survey 33 had a gearing of debt to shareholders’ funds exceeding 100%.
In the next article, we will be looking at Relationships with Lenders.
If you would like to learn more about the warning signs of business failure and or would like to discuss the future of your own business please contact me on the details below.