At some stage of running your business you are going to encounter problems. The level of impact that they have on your business will depend to a certain degree on what contingency plans you have in place to deal with them. Problems will not be just financial. They could be non-financial but have just as devastating an effect as financial problems. In this chapter we will look at some of the problems that could occur and what sort of strategies you can have in place to deal with them.

Formulating Contingency Plans

Being Prepared For A Crisis

Crises can be classified into two main groups: external and internal.

External crises are those which are outside the control of the business but which affect the business environment. External crises may include family problems or a bankrupt client leaving bad debts and order cancellations. More extreme examples of external crises are often classed as disasters, e.g. fire, flood, bomb alert, or explosion.

Internal crises are those which occur within the business. They often have little or no effect on the external environment. Examples include power or machinery failure, a computer crash, data corruption or something as simple as losing your diary.

In the next section we will look at the specific problems of dealing with problem debtors, the most common financial crisis likely to affect you. For the moment we need to concentrate on some of the ways that you can mitigate the non-financial problems that could occur.

A crisis of any degree can have an adverse affect on a business, ranging from disruptive to devastating. If not properly managed, a crisis can lead to loss of earnings, reduction in profits and ultimately, may cause the business to go bankrupt. The damage caused by a crisis can, however, be minimised.

All possible remedial actions – for example, the procedures and personal areas of responsibility of key employees – should be considered to work out the best course of action in any given crisis. There are four key areas that you will need to consider:

• identification of the potential crisis
• gathering all possible information about the crisis and the circumstances which may lead up to it
• isolating the crisis
• what action can be taken to resolve the crisis and any damage caused by it.

A draft contingency plan can then be drawn up and tested. Once this has been carried out the plans should be documented in a form that is easily accessible by all relevant staff.

Dealing With Problem Debtors

It is absolutely essential that you have a system in place to deal with all aspects of your debtor book. Before even granting any form of credit to a debtor, you will need to undertake some investigation as to their creditworthiness.

You should never be afraid of refusing credit if you are in any doubt. You may lose the sale but it is better to lose the profit element on this sale than the whole amount of the sale itself by way of a bad debt. Always remember, you have not completed the sale until you are actually paid. All you have done is taken a gamble – consider the odds carefully before you place your bet.

It is crucial that you have some formal procedures in place to monitor your debtors. Some of these include:

• The imposition of a credit limit for each customer which you should never allow them to exceed.
• The monitoring of regular payments to clear the debt – as soon as payment becomes due make sure that you chase it up.
• Once a payment becomes overdue do not allow further credit on the account – even if the credit limit has yet to be reached.
• If the debt becomes excessively overdue, for example, your credit terms are 30 days and the debt has now been outstanding 60 days, then write to the customer demanding immediate payment.
• Follow up your letter after seven days with a further demand and giving notice that if necessary you will take legal action.
• If payment has still not been received after a further seven days then you should immediately consider issuing a summons. For debts of up to £5,000 these can be easily issued through a County Court.

Never allow any one customer an excessive amount of credit. A number of small businesses fail each year because of bad debts incurred through dealing with apparently large stable companies that go to the wall.