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Dealing with financial distress within your business?

A high percentage of businesses fail, and a common reason for failure is financial mismanagement, which causes insolvency. Keeping on top of cash flow can be a challenge; and poor cash flow can quickly lead to financial distress.  R2B Business Solutions have created a 5-point plan, that can help you work your way out of financial distress. The principles can also apply to personal finance too.

1. Plan a budget and identify where savings can be made

Over-spending is always going to have a negative impact on a business' finances. You must take stock of all your monthly outgoings, and decide which of these are essential, and which could be eradicated for now. Perhaps you are over-spending on stationery for example, or use a lot of different software packages that could be better streamlined into one package. Create a strict budget of how much is available to spend monthly and quarterly in each department. Also, plan some contingency budget for unexpected costs such as repairs and maintenance.

2. Plan your income. Can it be increased, and who owes you money?

It's important to have a sound idea of how much income you're going to receive month to month, before reinvesting this or spending it. If you're a cash based business such as a retailer or restaurant, you'll need to predict your sales daily, weekly or monthly and you may be able to do this with the help of your EPOS system. If you work on credit terms with your customers, you will have a sales ledger of invoices raised showing your upcoming income.

Can your business income be increased? Perhaps closer inspection into trends will show revenue can be increased by doing something differently. Maybe you're losing some profit by overspending in some areas of production. Perhaps with a little extra advertising, you could increase sales, or with better stock management, you can be prepared for peak times. Or maybe some extra staff training will help you recover missed opportunities to grow customer accounts.

Always pay attention to your debtors list too. If you have any outstanding invoices that are past due, act as soon as possible to recover this income. If recovering late payments is costing you money, consider how you can recover these costs. Our recent post on when to charge late payment fees will give you some guidance on this.

3. Understand who your priority and non-priority creditors are

There will always be some flexibility with creditors in hard times, and identifying which of your business debts are a priority will help you to catch up with payments and avoid hefty fines, interruption to trade or even legal action. Consider your relationship with each of your creditors and how much room there might be for negotiation. Ask the following questions:

  • What is the consequence of late payment? Will you be fined, or need to pay interest?
  • Will non-payment to a supplier affect your stock availability? Will essential services be cut off?
  • Which debts have the highest interest rates?
  • Will non-payment have a negative impact on your business credit score?
  • Have you already agreed a payment plan with the creditor, and were there any special terms to being allowed to spread payments?

4. Focus on reducing your high cost debt or debt that might become so, if ignored

Leaving high cost debts to fester will result in extra costs to your business and will severely impact on your cash-flow, and your overall profit and loss. Stay on top of your debts before they potentially escalate, and consider whether re-financing these debts is going to be a more effective solution. Debt re-financing is a key strategy in business turnaround where high interest rates are eating into profits.

Creditor negotiation is helpful when managing business debts, and sometimes it's good to enlist help from an expert, especially if there is emotional distress attached to speaking with creditors. R2B can support you with creditor negotiations, if needed, to put forward the right proposal to the creditors.

5. Stick to the plan and regularly review it

Getting out of financial distress takes focus and hard work, and is not a one-time scenario. You should revisit these 5 steps on a regular basis, at least once every 3 months to make sure you're staying on top of your business debts. It's easy to find quick fixes, but you should always consider how these will affect your business in the longer term. If you need any advice on managing business debts, please contact us for a free consultation.


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Archer House,
Britland Estate,
Northbourne Road,
Eastbourne, BN22 8PW

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