How to monitor your business and keep it safe: Macro factors, and the ability to change
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 third in our series we look at products, macro factors and the ability to change.
Ensuring that what you produce is reliable is a prudent trading model. You do not want products returning to you due to design/system faults or weakness in materials used as this will damage both your reputation and your bottom line. Warranty repair work is costly for businesses so avoiding this at the point of development of product is key to success otherwise the company’s’ reputation may be destroyed and many companies in the UK have found how difficult it is to shake off a past image of poor quality.
Research and Development
As stated above, inadequate research and development (R&D) will spell future problems either as sales drop because the product became outdated, or, if development is inadequate, the new product will be unreliable or unnecessarily expensive to manufacture.
Remember, there are HMRC tax reliefs to help with expensive costs for businesses doing R&D, something which our Tax Team here at Baldwins Accountancy Group are happy to assist with.
The ‘survivability’ of a business is linked to the ease with which it can change itself to meet changes in market conditions.
Some businesses are inherently difficult to change, usually because of heavy capital investment creating a high exit barrier. For example, it can cost £20m or more to terminate the lease on a modern commercial airliner. Another business with a very high capital investment factor is the petrochemical industry, where a plant may have to be planned five or six years ahead of the actual market conditions in which it will operate.
However, a business’s agility to adapt to changes in circumstances, in order to survive market changes, can be overcome with the right advice and financial structuring. Early advice is a must to discuss circumstances, requirements and options before market conditions become such that they prove the demise of a business.
Plan for lean times
This is also true of cyclical markets. Companies operating in cyclical markets are more at risk than those operating in a steady market.
The property market is cyclical as is the construction industry. In each cycle, many businesses in these markets fail because they lack the management skills necessary to handle the recession part of the cycle. This is particularly true of those businesses that have not yet experienced a recession. Having survived one recession the likelihood of surviving subsequent recessions improves.
Again, speaking with your adviser on how you can structure your cash flow and ‘save for a rainy day’ is always wise in cyclical sectors.
Don’t put all your eggs in one basket
Over-dependence on a single customer is a risky way to do business, unless of course the business can, if necessary, switch rapidly to selling elsewhere.
Having a diverse customer base and not relying on just one key client for your survival is a wiser business model. Also, having terms of payment agreed up front and with a legal and binding contract of engagement is a help, should things go wrong.
Don’t be marginalised
In the main, this is applicable for the manufacturing sector but can apply to other sectors, a business catering for temporary excess demand or supply. An example of this could a business that runs additional production capacity at a high price in times of high demand, or take surplus output at a low price for disposal in times of low demand. When that temporary over or under capacity in the industry ceases, the marginal operator is left with no business whatsoever.
Planning for production flow and, therefore, ultimately cash flow, would be wise. Diversifying your product lines rather than just relying on one item, or identifying new trends to be ahead of the curve, could be a shrewd move before fashions or technologies move on leaving you to move out!
In the next article we will examine Growth Rate.
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.