For just about every owner or manager, business is a very personal matter. The success of their business reflects on them. That is why so many are reluctant to admit it when things start to go wrong. Sadly, if they would only admit it early enough, a lot more businesses could be saved from going to the wall.
"Management denial is one of the biggest factors that can lead to downfall," says Business Recovery expert Mike Prangley, a partner at BDO Stoy Hayward. "Many failures could have been avoided if management had acknowledged obvious issues when they arose and sought advice and support."
The early warning signs that your business might be heading for trouble are not always easy to spot, especially when they are right in front of you. But there are a number of indicators. If you spot them early enough and take the appropriate action, you should be able to avoid getting into serious difficulties.
A lack of experience is often the real problem, according to a director at one current reseller, who saw his first business go under several years ago.
He told CRN: "The warning signs would have been pretty obvious if the management team had been more experienced. This is a very young industry and businesses are often set up by sales people as start-ups or through MBOs."
Sales people often have the enthusiasm and the drive to get a business off the ground, but lack the experience and business acumen to take it to the next stage. As a result, they end up over-trading and getting out of their depth.
"We had three directors with skills in sales and marketing, but we didn't pay enough attention to the detail - to what was on the P&L, nor to the hard and fast facts. We would always see the glass as half-full. You make money one month and you think you're going to keep on making it," he says.
Suddenly, distributors are all too eager to give you credit, and the ambitious sales people who started just a few months before with nothing, suddenly find themselves with massive spending power and a business that looks - at least to them - like it is going somewhere.
In the case of this particular reseller, a lot of money was spent on new premises and new ventures. Business experts and credit managers point to factors such as moving offices and speculation as two of the key early warning signs that a business is worth watching closely.
But our now recovered director says that there is an even earlier warning sign. "A business that is led by a sales director rather than the financial director is the earliest sign," he says.
Tracey Perkins, credit services manager at distributor Midwich, says a change of location often precedes a period of overtrading as sales-led directors stretch the business too far. "The cash just runs out, and by the time they get to us, it's often too late," she says.
As well as over-trading, entrepreneurial sales people are more likely to spend money on unnecessary luxuries and, when they do not sell products they expected to, hold on, believing they will sell them to someone. For the reseller quoted earlier, having money tied up in this way was also a problem. Every day that it was sitting there, it was falling in value.
Resellers that go bust seem to have several problems all at the same time; one tends to be symptomatic of the others. As our small case study illustrates only too well, a change of location or a venture into uncharted waters should also put you on alert.
Unfortunately, those most closely involved are not always the ones best placed to see the risk. What may seem like an extravagance to a cautious observer, will seem essential to the hungry businessman.
But it is not the cost and the risk associated with moving into a new building or a new area of the market that are the real problems. It is the effect the move has on the individual's ability to focus on their business.
All of the resellers we spoke to for this article wanted to remain anonymous. They are all in business today and have credit limits and insurers to worry about.
However, Steve Muttram, managing director of the company we know today as Portable Add-Ons, was prepared to talk openly about his experiences last year when the business went into administration. Many of the experiences he had echoed those of the resellers.
Portable plc went into administration last September before re-emerging in its present form with solid investment and funding from Expansys. It got into the PDA market too early, which de-focused the business. Portable plc was over-resourced from the beginning after having taken on as many staff as it could when it staged a management buy-out from Datrontech in 2000.
While this seemed like a good idea at the time, Muttram says, it helped eat up the initial funding. When the money ran out, he spent six months looking at an AIM flotation or reverse take-over to bring in funds. Neither of these happened, and this took up a lot of his time and focus.
At the same time, the company was entering the PDA market, in the hope of catching the wave early. "We invested a huge amount of money, time and energy into something that quite frankly, just wasn't ready and that took our eye off the core business," Muttram says.
Eventually the company withdrew from this part of the market but it was probably, in hindsight, eight to 12 months too late. Deciding when to call a halt is never easy.
"As we got deeper into it, the return on investment looked further away. We were looking at the dream and you keep pushing in the hope that a project is going to roll. It's very hard to say when it's right to go back on it, especially when you have told everyone that you are committed to that strategy," Muttram says.
If you do go into a new market, you need to find it properly and give it time. One reseller that has a focus on high-end systems told CRN: "We are trying to position ourselves as Linux solution specialists, but you need real business-related products, which we haven't got yet. The moral is: 'Don't hang onto a market that is declining for too long.'"
Having a different perspective on when it's right to get in or out of a market will help. Muttram says: "Although I had three partners, they were not involved day-to-day, and I found that lonely at times. I'd have welcomed having someone on board who could challenge me commercially and technically.
"I've got that now in Roger Butterworth [chief executive of Expansys]. It's like a breath of fresh air."
Other events can also trigger a downward spiral and take the focus of principals away from key areas. A break-away by a key director, partner or sales executive is often an early sign that things might be taking a turn for the worse. This may be because they are going to set up a rival business and will take customers with them, or simply because the principals of the company have fallen out.
Depending on business from a small group of customers can also be dangerous, so looking at your cashflow dependency is worthwhile. Another sign will be a simple fall-off in sales or a loss of motivation among sales staff. Being tough on the people aspect of your business is hard, but it may be necessary.
Another sign to watch for is what one expert describes as "forced directional change". If you can see signs that you might have to change the way you do business, you should be extra vigilant. The changes might affect the volume of business you do and hit cashflow. Even if the level of business is decent, it could have an impact on financing, especially if you use invoice discounting.
When you change the mix of your business, discounters will not always provide the same ratio of payment for certain types of invoices. If you had supplied product, for example, there is something tangible upon which a claim can be made for payment; if payment is being made for a service that you are delivering, there is nothing definitive to make a claim against.
This is why it is important to keep financiers informed of any changes to the type of business you are conducting.
But the word 'forced' implies something more. If the change is strategic you can plan it; if it is compelled then things were probably already going wrong.
If you do spot trouble ahead, it is important to act swiftly and decisively. Eddie Pacey, director of credit services at Bell Microproducts, says too few resellers look hard enough at their own businesses on a regular basis and would do well to get a third party to check their business for chinks in their armour.
"Many of them jump through the hoops to get vendor accreditation but never get anyone to give them a once-over. Occasionally it's a good idea to do a little health-check to make sure you are heading in the right direction," Pacey says.
Financial advice is relatively easy to find, and suppliers may be able to help if you have a good enough relationship with them.
If you do get into trouble, the best course of action is often to tell your key suppliers. But resellers have always been very reluctant to do this, and in spite of many years of turbulence, this remains the case today.
"Most people will find that the largest amounts are owed to only a few suppliers and these are probably the first companies you should turn to for assistance. Unfortunately not many people do it," Pacey adds.
It is only when they cannot pay that most will approach the distributor, Perkins says. She adds that between five and 10 resellers come to her every month. About half have real problems.
Midwich and other distributors may offer to help chase payments up, to re-schedule the debt, or even take it on themselves. They will also offer to check credit references for potential deals that will leave the reseller exposed. All too often though, these services are called upon when it is too late.
Pride can prevent business heads seeking help and advice earlier, even when they know trouble is brewing. Muttram says calling in advisors Chantey Vellacott at an early stage was the best move he made at that turbulent time. He advises any firm that runs into trouble to do the same.
"They spell out what your obligations are to your staff and creditors, and it was quite an eye-opener," he says. "We were fortunate that we went to them early enough."
As a result, most creditors did not come out of the situation too badly and the reputation of Muttram and his company was not seriously tarnished. Today Portable Add-Ons is a thriving business with solid backing from Expansys.
Resellers, however, tend to be much more nervous about their reputation, and if the experience described in our case study is anything to go by, they have good reason. Once bitten, creditors are likely to be twice shy. But they may be more sympathetic if you go to them early and are as open as possible when you have problems.
According to Prangley, suppliers and lenders are likely to be more sympathetic if you are pro-active in approaching them for assistance, "especially if you have a well-thought-out strategy, rather than waiting until a breach of facilities or covenants is imminent".
Having a good relationship with suppliers is very useful if you do want to save face. For many resellers this is really important, Pacey says.
"They are very private and proud people and sometimes you have to dig it out of them [when they are in trouble]. It comes down to the relationship and face-to-face contact is very important. It makes a hell of a difference if you have that trust," he adds.
While there may be problems to sort out with the debt insurers, most distributors and vendors will do whatever they can to help a valued customer - especially one that owes them money - to dig itself out of trouble. Providing that is, that you give them the full picture.
Pacey told CRN about a situation that developed last year with a reseller that was formed through the merger of two rival firms. The director who was placed in charge of the accounts massaged figures to make it look like the merged business was doing much better than it really was; when this was discovered there was already a £1.5m hole in the balance sheet.
"They had to go cap in hand to their major supplier - who was owed a lot of money - and come clean. They got rid of the people involved and, for about nine months, we had to extend a bit more credit to them. Now, I'm pleased to say, they are doing well again," Pacey says.
Going to suppliers really can work and give you time to get back on your feet. The trick is not leaving it until it is too late and it gets to the point where no one is willing to take the risk that you won't recover. By watching out for the danger signs, hopefully it will never get to that point.
Portable Add-ons (0870) 460 7720
Bell Microproducts (020) 8286 5000
BDO Stoy Hayward (020) 7486 5888
Midwich (01379) 649 200
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