What do I do if my company doesn’t trade profitably?
Last week I visited a client whose company had posted a succession of trading losses.
In fact, for the first time since the company was incorporated the balance sheet was negative. Its liabilities exceeded its assets. The company was technically “insolvent”.
There were clear signs that the client was potentially facing financial ruin and the company may have suffered greatly had we not intervened.
When I met the director of the company I advised her that there would be significant adverse financial implications on her should this adverse trend continue. I warned her that, under certain circumstances, she may be held personally liable for the company’s debts.
It was clear to me that it was important that the director should not continue in business unless she had a plan of action in place to ensure she turns the company round and starts to trade profitably from now on. Therefore, we underwent a rigorous review of all the company’s costs and anticipated sales so that, going forward, the company at least breaks even and the company’s financial position doesn’t worsen.
As the company was also experiencing some cash flow problems, it was essential to determine that the company would be in a position to pay its debts as well they fall due and could work comfortably within its existing overdraft facility.
This meant working closely together with the client in compiling a comprehensive and robust cash flow forecast which took into the account the expected receipts and payments of the company on a week-by-week basis.
At the end of our session, the director had a clear plan in place which, if successfully adhered to, would ensure that the company returns to a solvent position with healthy profits and a positive cash flow.
Also, in order to establish a better credit rating with its suppliers, it was necessary that the company’s accounts reflected a more favourable position at Companies House. Therefore, it was decided that the director/shareholder would capitalise some of her director’s loan account with the company. This had an immediate positive impact on the balance sheet by changing its insolvent position into a solvent one.
Everything we did with the client made sense. We helped her understand how vital it was for the company to trade profitably and to generate a positive cash flow.
Now the future for the company is looking very encouraging indeed. Trade is picking up again and the director has a clear plan against which to benchmark her company’s financial performance.
Without our involvement, the director may have found herself in all kinds of difficulties with no easy way out. Fortunately, she can now sleep at night in the knowledge that her company’s financial position is as solid as she could have hoped for under the circumstances.
I realise that, with the current economic and political uneasiness being caused by the Brexit dilemma and other factors, my client will not be alone in running a company that regrettably is generating losses instead of profits. If you ever find yourself in that position and want help in finding a solution, please feel free to call me on 01925 761600 or email at email@example.com