Retail comment: How do you know you’re going bust?

One of the ultimate taboos in business, becoming insolvent, is an unpalatable possibility rarely acknowledged or discussed subject, despite company administrations currently at their highest level in five years in the UK. Colin Rees shares his experiences of going bust as a business owner and warns against hanging on ‘just in case’ things turn around…

In a business life of 40-plus years, with the formation of seven companies trading in various different activities you would think an owner would know when things are getting close to the end.

But it is such a monumental event in someone’s life, to lose a dream, anyone in that position can be forgiven for hanging on for grim death ‘just in case’ it all works out.

In my case, there were two instances in my seven of going bust, both not of my making, when I had to take some huge unpalatable decisions. Like many in that position, I failed to believe it could happen to me.

The most traumatic event was when the bank called in a £35,000 loan we had. As a directive Head Office had demanded all the businesses operating in my activity had their loans called in and had to be paid off in full within two months. Had I not sold everything which included two of our three branches, immediately ‘let go’ of six staff – leaving me and one other – and having a huge piece of luck in finding a buyer for our computer system, my family would have been on the street and someone strange would be living in my house.

The trouble is, and it is easy to say afterwards, if it doesn’t look good right now, unless there is a fundamental change in circumstances, it will most likely get worse. As with most situations, there are things you can do when you start trading or when you are trading. The first is to buy a Limited company off the shelf for about £250 and trade through that. If you are a partnership or a sole trader, the debts are all going to be down to you personally if it all ends badly. With a Limited liability company, they only knock on your door if you have been trading insolvently. A company becomes insolvent when it cannot pay its creditors (lenders, suppliers) back on time.

The second is to reduce borrowings and build a surplus before you buy a Porsche. Common sense but you might be surprised the number of new business people who think that all the funds coming in are for their sole use.

Sadly, no one told them the object is to create net profit, not gross profit. Trading on the sentiment of ‘a business that is not growing being already in decline’, is a good one. If sales figures drop, watch them closely. Is it a trend? Has pedestrian flow worsened? Has the spend per customer dropped? If any or all of these indicators show adversely for a period, your business is not growing and the warning lights are on. It may well be time, right now, to ‘cut the cloth’. Pilot training, particularly when deciding if the weather is flyable, contains the key phrase… if in doubt, there’s no doubt. If cash flow starts to become a problem, it is another indicator that all is not right. I well remember sleepless nights before the end of each month, worrying if there will be enough for me to draw a salary or not. That’s another warning sign.

If things start to look ‘iffy’ over a period, specific areas need looking at. A golden rule is never to delegate buying to anyone else. Invariably, staff do not understand, there are two ways to make net profit: selling more and saving costs. Holding high levels of stock is an easy way for a retailer to get into trouble. Bike shops often stock five or six brands when two or three will do. Good sales people sell what is there. Good buyers do not get taken in by marketing or buy on their idea of fashion; they buy what the market in that location needs.

So is hanging onto stock that never sells. Often, it is better to put that stock on the ‘specials’ rack at 50% off at the front of the store than have it kicking around getting dirty. If red flags are waving, wait to replace stock you sell for a while and walk round repricing every product, putting £1
– £5 on every single item depending on levels. Customers are unlikely to notice and that goes directly to your bottom line. A helmet selling for £63 will not stop selling if it goes to £66 and that increase is immediate.

Make sure you have loads of well publicised offers, specials, promotions, blue cross events any way you can think of to excite and motivate customers. Fill the window with offers, not bikes costing £3,000. You need to get people in, give them a great, happy service and make sure they
come back by sending them away with some £5 off coupons they can only redeem in your store.

Staff are the most emotive area in making savings but they are also, probably, your biggest cost. Many retail stores work as a family team and to lose a family member is just awful; which is why that decision often comes far later than it should. If a business is trading less than it has been, there is less work to do and often efficiency can be vastly and quickly improved by reallocating job duties.

Sometimes, if the writing is on the wall and trade is looking seriously difficult, one early move to save cost might be to put staff on to a temporary part time three-day week or flexible working arrangement as savings are paramount to mitigating the end loss.

People advocate talking to the landlord to explain the position and ask for a six month reduction in rent while the business recovers. Often, it is better for a landlord to grant that than to have no income at all. It would all be along the lines of looking at every part of the business to see where costs and expenses could either reduce or be cancelled.

I have a reputation in the industry for my aversion to discounts and I know some owners feel I live on another planet. If your business gets into difficulties however, at least, cut your discounts in half and avoid percentages which are far more ruinous than £1 notes. Are you certain every member of your local bike club always comes to you and that’s the reason they all get 10% off regardless? Of course not and it’s crazy. Add up their sales and give 2.5% to the club annually so all members can share it, not to individual members.

So the starting points then are staff, reduce the hours worked in whatever way suits the business but ensure there is an immediate reduction. Cut the stock, look for reductions in brands paying particular attention to what is ordered as everything ordered has to be paid for eventually. Get rid of anything that has been hanging round for ages. Better to get back some of what you paid for it, than leaving it lying around, gathering dust. Walk round the store and add small amounts to everything. You are no longer trying to compete but to survive and that increases net profits.

When all that is done, look at the overall deficit and target sales to what to pay off week by week. But there is no point in half repairing a leak when you do not know where it is coming from. Look at every part of the business. Where is the problem? Is it not enough customers?

Is it those people who do come in do not spend enough and why is that? Are the staff selling upwards by suggesting extra products and closing every sale? Are you giving away too much, how can you reduce it? Plan a series of seven day promotions. Once it’s gone, it’s gone.

The watch word is above. You have stopped competing. Now, you need to stay in business. The faster you act, the more you will save. By looking carefully at the trends, you will identify the problem. If your business is not growing, it may be time to take immediate action. The longer you leave it, the worse it gets and wishing it wasn’t happening to you is human nature, but not a cure. It is a sure path to going bust.

It’s painful and it’s probably not your fault, but it is how it is and it needs sorting out quickly. I wish you well. I’ve been there.