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In the third in a series on access to finance, Rebecca McNeil, head of Business Lending at Barclays UK Retail Business Banking, Products & Segments, looks at the ways SMEs can respond when the going gets difficult

This article was first published in the October 2012 UK edition of Accounting and Business magazine.

Q:

I’m concerned that the performance of my business isn’t going to plan. What key steps should I take to improve things and how can my bank help?

A:

A number of warning signs could indicate that all is not going as well with your business (or, indeed, your client’s business) as you’d like. Difficulty paying suppliers, a rise in negative customer feedback or the arrival of a major competitor in your local market – all these could suggest a business faces a period of difficult trading.

The essential advice to anyone in this situation is: don’t ignore it! You can’t just keep your fingers crossed that things will improve on their own; you must take action. However, you must take informed action, and not just jump to conclusions about the cause of your business problems and, therefore, what you need to do to put things right.

A first step should always be to analyse the situation thoroughly. Try to understand the root of the problem objectively, even if it feels obvious. Make use of your business plan to help you clarify where actual results are not conforming with your forecasts. Your business plan should always be a living document that you refer to on a periodic basis, updating your short, medium and long-term plans. Refer back to any previous SWOT analysis identifying your business strengths, weaknesses, opportunities and threats, which could provide further insight.

Is the problem internal to the business, or due to an external factor? If it is external, this doesn’t necessarily mean you can’t control the situation. If your margins are lower than expected because key suppliers have increased their prices, you could respond by attempting to negotiate better deals or finding new suppliers.

External factors could include ‘acts of god’, such as fire, floods and riots. Ideally, you should have appropriate insurance in place to cover the associated costs and loss of businesses. How you protect your business from the unexpected should always be part of your business plan. You should be regularly asking yourself: ‘How would my business cope if my main client or supplier went bankrupt or my top salesman became ill?’ Then capture your solutions in your plan, taking any action necessary.

Tap into your support network when conducting your analysis and looking for solutions. Go back to the people who helped you write your business plan, your advisers, your mentor – anyone you trust or who you know has been in a similar position themselves. Use all these contacts to help formulate a number of options to combat the difficulties you face.

You may decide you need to tap into new markets, spread your risk by diversifying your products or services, or improve business efficiencies. You may well need to adopt a combination of several solutions. The right answer will depend on your specific situation.

Talk to your bank

If you suspect your business is getting into difficulty, one of the most important people to talk to is your bank’s business manager – and early on. Even if your business isn’t in trouble yet but you have spotted warning signs, talking through these issues with the business manager could help. Your business manager may be able to suggest ways to adjust your business plan to avoid or address the problem. He or she may be able to draw on experiences of working with other businesses in your sector, or may even have personal experience of running a business themselves. Many Barclays business managers, for example, have been entrepreneurs themselves in the past, so have a direct understanding of the variety of challenges a business can face. Your business manager may also be able to introduce you to local entrepreneurial support networks, or even to other bank customers with whom you may be able to do mutually beneficial business.

It is absolutely essential that you talk to your bank if you are about to miss a payment. Be open with your business manager about the problems you are facing. The bank may be able to help by offering you a payment holiday or changing the terms of your finance facility. At the very least, the business manager is likely to make a note on your account that you have been proactive in keeping the bank informed, and this could stand in your favour in future discussions about funding arrangements. Banks don’t like surprises, so always try to be as upfront as you can.
 

Your business manager may propose a full review of your financial situation, going through your business balance sheet and profit and loss account in detail. This could include discussion of your growth assumptions and the way your business finance is structured to support that growth.

Such discussions and reviews may indicate that your business would benefit from a restructuring of its finances to help it through a difficult period and support its future growth. For example, providing a further facility could be the answer if the business needs to support its expansion. Perhaps agreeing a capital repayment holiday for a number of months might be appropriate to give the business a little breathing space. Increasing the overdraft might be a sensible response to greater than expected trading fluctuations. Variable lending might be converted into a fixed-term loan to provide the business with more certainty over debt repayments. Alternatively, linking finance to sales growth, as through invoice discounting or factoring, might give the business the greater flexibility it needs.

Turning it around

If your business hits a difficult patch, turning the situation around depends on careful analysis, making use of all available support, identifying appropriate actions and making full use of the support available from your bank. Taking action early puts you in the best position to address the challenges your business faces.

In some circumstances, you may find your business is in danger of insolvency. In this case, working closely with your bank is again absolutely vital. For businesses that meet certain criteria, Barclays Business Support provides a consultancy service designed to avoid their failure. Of businesses that accept this help from Barclays, 80% successfully turn their situation around.

Always remember that, even where things look bad, solutions can often be found – but your chances of success are best if you make full use of the support available, not least from your bank.

Online advice on business finance

This article is just part of a partnership between ACCA and Barclays,
which is helping SMEs to grow.

The initiative extends to a jointly branded area of ACCA’s website providing advice to accountants in practice and SMEs on obtaining business finance.

Written by experts from both Barclays and ACCA, the site:

  • looks at the different types of finance available
  • explores what to consider when choosing which one is the right option for their business
  • explains how different types of loans are structured
  • provides guidance on making that all-important loan application.

There are also examples on the site of business plans and cashflows to help put together an effective loan application.

 

Last updated: 4 Apr 2014