Before you can make any change to your business, you need to identify where the problems are.

Look at your business plan and accounts. Where does reality not match up to what you anticipated? How long has the issue existed? Is it a temporary problem or something more longstanding?

Many businesses find it beneficial to use an accountant to work on their business' finances. A professional will be able to give you an insight into where your problems might be coming from.

Your cashflow is one of the most important aspects of your business. Without enough liquid assets to pay your bills, your business will fail. A cashflow forecast will give you a good idea of how much money you have coming in and out of the business, even to the extent of keeping track on a daily basis. See cashflow forecasts.

Once you have a good sense of what is happening in your business, you can make plans that put you back in control. You can also adjust your business plan, forecasts and budget and check that your proposals make sense. It may be necessary to reduce the amount you take out of the business until profitability and cashflow improves.

It is important to keep your business plan and other documents updated, and refer to them frequently, so you can see whether your changes are having a positive effect. If you decide you need financing, any investor will want to see your detailed evidence of plans to improve the business. You cannot expect an investor to commit funds if you do not convince them that your business has a reasonable chance of success.

For more information see write a business plan: step-by-step.

If your business is finding it hard to pay its debts, you need to make sure you are collecting all the money that is due to you.

Have a system to quickly identify when payments become late and always chase them up. You have the right to charge interest on all late payments.

If you lose control of debts owed to you, then your debt-to-asset ratio will increase, resulting in most of your business assets being financed through debt. Your debt-to-asset ratio is your total liabilities divided by your total assets. If your business has a high debt-to-asset ratio it can be dangerous, especially if creditors start to demand repayment of debt.

Improving cashflow

There are lots of ways you can tighten up your cashflow and get your customers to pay on time:

• Payment terms - you need to agree terms and conditions with your customers that set out items such as credit limits and when you expect to receive payment. Having clarity on these issues makes it obvious when a payment becomes late. For more information, see invoicing and payment terms.
• Invoices - send out invoices promptly with all information clearly set out, eg amount due, payment due date. If you do not send an invoice, you will not get paid, and if you send an invoice with confusing information you are simply giving your customer an excuse to query and delay.
• Recovering debts - if you can't get your customer to pay you, there are a number of options available to you. See ensure customers pay you on time.
• Factoring - when trying to recover unpaid debt you can sell invoices to a third party, in a process called factoring. Another method of getting cash quickly is invoice discounting, which is only open to certain types of businesses. Both of these incur costs, but could be considered as a way to release capital. See factoring and invoice discounting.
• Credit checks - if you take on new customers to improve sales, make sure you run credit checks. You do not want to add a bad payer to your existing problems. See credit checking your customers and setting credit limits.
• Cashflow forecast - keep and maintain a cashflow forecast, so you know when money is due to come and go out of your business.

For more information, see cashflow management.

Overtrading 

However tempting it might be to attempt to turn your business around by simply pushing for more sales, you should first assess whether your cashflow can handle a sudden increase in trade.

If you take on more business than your cashflow or current assets can cope with, you could be at risk of overtrading. Overtrading occurs when you try to fulfil an increase in orders without having the working capital to cover the costs involved - eg overtime, extra stock and supplies - before the money from sales comes in. Overtrading is extremely serious and could cause your business to fail. See avoid the problems of overtrading.

Many things can change the market your business operates in, from new competitors and innovations to a general slowdown in the economy. If your business is in trouble, you could benefit from fresh information on your market, customers and potential customers. You might discover your sector has changed and that your lack of response has contributed to your problems.

Information sources

There are a number of places where you can get information, some of which are free, including:

• government reports and statistics
• local Trade Associations
• Chambers of Commerce
• local authorities
• commercial publishers of market reports

You could also do your own research, which will allow you to target the issues and markets you are most interested in. For more information, see market research and market reports.

Once you have some information about the way the market is moving, you can see whether your business could be made more competitive. If demand for your product or service is shrinking, you could consider diversifying into other areas where you have existing skills and technical expertise.

Customers and competition

An alternative strategy could be to exploit a currently underserved niche. Do your customers have any needs you could potentially fulfil? Is there anything you do particularly well that you could focus on?

Your customers are an extremely useful commodity. Take advantage of your existing relationships to see what they think of your business. You should also try to identify your most valuable customers and do more trade with them. Use the Pareto principle (often known as the 80/20 rule) - it suggests that around 80% of your profit is gained from 20% of your customers.

Changing your pricing strategy is another option. Raising prices will help your profit margin but total sales may fall, so re-emphasising the benefits of your product or service can offset the impact of a rise.

Cutting prices may seem counterintuitive but could encourage new sales. Be careful, however, not to let quality or service slip at the same time - see price your product or service.

One reason for your business having financial difficulty could be the entrant of new competitors into your market, or existing competitors expanding or doing something different. Find out as much as you can about what your competitors are doing and plan a response. Do not imitate them - they have already staked out that area of the marketplace - but select ideas that would work for your business and innovate.

For more information, see understand your competitors.

Making your business more efficient will save time and money. This is often taken to mean cutting costs but, while cutbacks can be a part of it, there are other routes you can take.

1. Business processes

Are all your business processes as streamlined as they could be? Are there examples of bottlenecks or duplication of effort? Talk to your staff, as the people doing the tasks regularly will probably have ideas for how they can be improved.

2. Cost-effective staff

Make sure you're getting the most from your staff. Do they all have the right skills they need to do their jobs? Are they motivated to do their best for your business? If they pick up on the possibility that the business might be failing, productivity may drop and valuable staff might leave. Bring them in on your plans early and ask for their feedback.

Sometimes you may have no choice but to consider reducing staffing costs, through reducing hours or making redundancies. Remember that making redundancy payments could increase costs in the short term, and may cause the remaining employees to feel insecure.

3. Reducing overheads

You can reduce overheads in other areas, like cutting back on advertising or purchases of new equipment. However, be wary of sacrificing long term investment for the sake of short term cost savings. For more information, see avoid insolvency.

You should also review your assets and consider whether any are surplus to requirements and can be sold to raise cash. This might include unused land or stocks.

You should consider reducing waste, write-offs and theft of stock. This is an area where most businesses can make significant gains in their gross margin percentage. See create a strategy to reduce business waste.

Theft can have a negative effect on a retail business' turnover - which could represent a significant potential increase in the gross margin if it is eliminated.

With those possible gains it is worth considering security measures, for example, mirrors, CCTV, or more staff on duty at peak times. Better stock management can reduce write-offs from having to offer a discount on unsold goods or throwing out perishable stock after its sell by date.

Occasionally the situation may require more radical solutions, for example, to avoid bankruptcy. If you need to restructure your debts, an Insolvency Practitioner can help you. For more information, see: 

• insolvency
• company liquidation 
• bankruptcy

There are several options to consider which may improve the profitability of your business, such as increasing trade or re-evaluating individual or entire financial aspects.

Whatever area you exploit, you will need to know your business inside out to improve performance and maximise the potential for profit. For more information, see strategies to improve sales and profitability.

How to check and measure profitability

Apart from ensuring your cashflow is under control, you must also regularly check your profitability.

The net profit is the amount of money left after paying all your bills. It determines how much money you can safely take out of the business for your living expenses and to pay taxes.

You will receive an annual set of accounts from your accountant. However this can be up to nine months after the end of the financial year. You need to check profitability much more frequently and more promptly, using monthly or weekly figures.

A good approximate measure of profitability is the gross margin. The gross margin is the value of sales less the direct cost of sales. So, if sales are £200 and the cost of sales were £120 the gross margin is £80 or 40% on sales. Gross margin is a unique basic comparison of differing businesses.

Secondly, to calculate the profitability of a business all you have to do is to deduct the business' overheads from the gross margin. So if the gross margin is £1,000 and the overheads are £600 the net profit is £400. Overheads tend to be fixed in the short term so gross margin becomes a good indicator of profitability and can be calculated quite simply.

For more information, see set up a simple profit and loss account for your business.

Alternatively, your accountant can help you set a basic measurement of your gross margin on a weekly or monthly basis. They can also help you understand other important ratios in your accounts.

Sometimes, despite all your best efforts, your business may fail. Rather than continuing to fight a losing battle and increasing your losses, it might be better to take a decision to wind up your business before you are forced into insolvency by a creditor.

You can either close down your business yourself or you can find someone willing to buy it from you - though, as you would be selling a failing business, this option is unlikely and you wouldn't receive much in return.

For more information, see consider your exit strategy when starting up a business.

You should write a plan outlining everything you need to do, including closing customer accounts, notifying staff and disposing of assets.

Tax implications

Regardless of how your business closes, you may still have to file Company Tax Returns and pay Corporation Tax and Capital Gains Tax.

If you don't have the expertise in-house, you will need to engage specialist professional advisers to make sure you notify the right people and complete your tax and other financial obligations.

HM Revenue & Customs provide further information on selling or closing your company and corporation tax.

Before you can make any change to your business, you need to identify where the problems are.

Look at your business plan and accounts. Where does reality not match up to what you anticipated? How long has the issue existed? Is it a temporary problem or something more longstanding?

Many businesses find it beneficial to use an accountant to work on their business' finances. A professional will be able to give you an insight into where your problems might be coming from.

Your cashflow is one of the most important aspects of your business. Without enough liquid assets to pay your bills, your business will fail. A cashflow forecast will give you a good idea of how much money you have coming in and out of the business, even to the extent of keeping track on a daily basis. See cashflow forecasts.

Once you have a good sense of what is happening in your business, you can make plans that put you back in control. You can also adjust your business plan, forecasts and budget and check that your proposals make sense. It may be necessary to reduce the amount you take out of the business until profitability and cashflow improves.

It is important to keep your business plan and other documents updated, and refer to them frequently, so you can see whether your changes are having a positive effect. If you decide you need financing, any investor will want to see your detailed evidence of plans to improve the business. You cannot expect an investor to commit funds if you do not convince them that your business has a reasonable chance of success.

For more information see write a business plan: step-by-step.

If your business is finding it hard to pay its debts, you need to make sure you are collecting all the money that is due to you.

Have a system to quickly identify when payments become late and always chase them up. You have the right to charge interest on all late payments.

If you lose control of debts owed to you, then your debt-to-asset ratio will increase, resulting in most of your business assets being financed through debt. Your debt-to-asset ratio is your total liabilities divided by your total assets. If your business has a high debt-to-asset ratio it can be dangerous, especially if creditors start to demand repayment of debt.

Improving cashflow

There are lots of ways you can tighten up your cashflow and get your customers to pay on time:

• Payment terms - you need to agree terms and conditions with your customers that set out items such as credit limits and when you expect to receive payment. Having clarity on these issues makes it obvious when a payment becomes late. For more information, see invoicing and payment terms.
• Invoices - send out invoices promptly with all information clearly set out, eg amount due, payment due date. If you do not send an invoice, you will not get paid, and if you send an invoice with confusing information you are simply giving your customer an excuse to query and delay.
• Recovering debts - if you can't get your customer to pay you, there are a number of options available to you. See ensure customers pay you on time.
• Factoring - when trying to recover unpaid debt you can sell invoices to a third party, in a process called factoring. Another method of getting cash quickly is invoice discounting, which is only open to certain types of businesses. Both of these incur costs, but could be considered as a way to release capital. See factoring and invoice discounting.
• Credit checks - if you take on new customers to improve sales, make sure you run credit checks. You do not want to add a bad payer to your existing problems. See credit checking your customers and setting credit limits.
• Cashflow forecast - keep and maintain a cashflow forecast, so you know when money is due to come and go out of your business.

For more information, see cashflow management.

Overtrading 

However tempting it might be to attempt to turn your business around by simply pushing for more sales, you should first assess whether your cashflow can handle a sudden increase in trade.

If you take on more business than your cashflow or current assets can cope with, you could be at risk of overtrading. Overtrading occurs when you try to fulfil an increase in orders without having the working capital to cover the costs involved - eg overtime, extra stock and supplies - before the money from sales comes in. Overtrading is extremely serious and could cause your business to fail. See avoid the problems of overtrading.

Many things can change the market your business operates in, from new competitors and innovations to a general slowdown in the economy. If your business is in trouble, you could benefit from fresh information on your market, customers and potential customers. You might discover your sector has changed and that your lack of response has contributed to your problems.

Information sources

There are a number of places where you can get information, some of which are free, including:

• government reports and statistics
• local Trade Associations
• Chambers of Commerce
• local authorities
• commercial publishers of market reports

You could also do your own research, which will allow you to target the issues and markets you are most interested in. For more information, see market research and market reports.

Once you have some information about the way the market is moving, you can see whether your business could be made more competitive. If demand for your product or service is shrinking, you could consider diversifying into other areas where you have existing skills and technical expertise.

Customers and competition

An alternative strategy could be to exploit a currently underserved niche. Do your customers have any needs you could potentially fulfil? Is there anything you do particularly well that you could focus on?

Your customers are an extremely useful commodity. Take advantage of your existing relationships to see what they think of your business. You should also try to identify your most valuable customers and do more trade with them. Use the Pareto principle (often known as the 80/20 rule) - it suggests that around 80% of your profit is gained from 20% of your customers.

Changing your pricing strategy is another option. Raising prices will help your profit margin but total sales may fall, so re-emphasising the benefits of your product or service can offset the impact of a rise.

Cutting prices may seem counterintuitive but could encourage new sales. Be careful, however, not to let quality or service slip at the same time - see price your product or service.

One reason for your business having financial difficulty could be the entrant of new competitors into your market, or existing competitors expanding or doing something different. Find out as much as you can about what your competitors are doing and plan a response. Do not imitate them - they have already staked out that area of the marketplace - but select ideas that would work for your business and innovate.

For more information, see understand your competitors.

Making your business more efficient will save time and money. This is often taken to mean cutting costs but, while cutbacks can be a part of it, there are other routes you can take.

1. Business processes

Are all your business processes as streamlined as they could be? Are there examples of bottlenecks or duplication of effort? Talk to your staff, as the people doing the tasks regularly will probably have ideas for how they can be improved.

2. Cost-effective staff

Make sure you're getting the most from your staff. Do they all have the right skills they need to do their jobs? Are they motivated to do their best for your business? If they pick up on the possibility that the business might be failing, productivity may drop and valuable staff might leave. Bring them in on your plans early and ask for their feedback.

Sometimes you may have no choice but to consider reducing staffing costs, through reducing hours or making redundancies. Remember that making redundancy payments could increase costs in the short term, and may cause the remaining employees to feel insecure.

3. Reducing overheads

You can reduce overheads in other areas, like cutting back on advertising or purchases of new equipment. However, be wary of sacrificing long term investment for the sake of short term cost savings. For more information, see avoid insolvency.

You should also review your assets and consider whether any are surplus to requirements and can be sold to raise cash. This might include unused land or stocks.

You should consider reducing waste, write-offs and theft of stock. This is an area where most businesses can make significant gains in their gross margin percentage. See create a strategy to reduce business waste.

Theft can have a negative effect on a retail business' turnover - which could represent a significant potential increase in the gross margin if it is eliminated.

With those possible gains it is worth considering security measures, for example, mirrors, CCTV, or more staff on duty at peak times. Better stock management can reduce write-offs from having to offer a discount on unsold goods or throwing out perishable stock after its sell by date.

Occasionally the situation may require more radical solutions, for example, to avoid bankruptcy. If you need to restructure your debts, an Insolvency Practitioner can help you. For more information, see: 

• insolvency
• company liquidation 
• bankruptcy

There are several options to consider which may improve the profitability of your business, such as increasing trade or re-evaluating individual or entire financial aspects.

Whatever area you exploit, you will need to know your business inside out to improve performance and maximise the potential for profit. For more information, see strategies to improve sales and profitability.

How to check and measure profitability

Apart from ensuring your cashflow is under control, you must also regularly check your profitability.

The net profit is the amount of money left after paying all your bills. It determines how much money you can safely take out of the business for your living expenses and to pay taxes.

You will receive an annual set of accounts from your accountant. However this can be up to nine months after the end of the financial year. You need to check profitability much more frequently and more promptly, using monthly or weekly figures.

A good approximate measure of profitability is the gross margin. The gross margin is the value of sales less the direct cost of sales. So, if sales are £200 and the cost of sales were £120 the gross margin is £80 or 40% on sales. Gross margin is a unique basic comparison of differing businesses.

Secondly, to calculate the profitability of a business all you have to do is to deduct the business' overheads from the gross margin. So if the gross margin is £1,000 and the overheads are £600 the net profit is £400. Overheads tend to be fixed in the short term so gross margin becomes a good indicator of profitability and can be calculated quite simply.

For more information, see set up a simple profit and loss account for your business.

Alternatively, your accountant can help you set a basic measurement of your gross margin on a weekly or monthly basis. They can also help you understand other important ratios in your accounts.

Sometimes, despite all your best efforts, your business may fail. Rather than continuing to fight a losing battle and increasing your losses, it might be better to take a decision to wind up your business before you are forced into insolvency by a creditor.

You can either close down your business yourself or you can find someone willing to buy it from you - though, as you would be selling a failing business, this option is unlikely and you wouldn't receive much in return.

For more information, see consider your exit strategy when starting up a business.

You should write a plan outlining everything you need to do, including closing customer accounts, notifying staff and disposing of assets.

Tax implications

Regardless of how your business closes, you may still have to file Company Tax Returns and pay Corporation Tax and Capital Gains Tax.

If you don't have the expertise in-house, you will need to engage specialist professional advisers to make sure you notify the right people and complete your tax and other financial obligations.

HM Revenue & Customs provide further information on selling or closing your company and corporation tax.

Before you can make any change to your business, you need to identify where the problems are.

Look at your business plan and accounts. Where does reality not match up to what you anticipated? How long has the issue existed? Is it a temporary problem or something more longstanding?

Many businesses find it beneficial to use an accountant to work on their business' finances. A professional will be able to give you an insight into where your problems might be coming from.

Your cashflow is one of the most important aspects of your business. Without enough liquid assets to pay your bills, your business will fail. A cashflow forecast will give you a good idea of how much money you have coming in and out of the business, even to the extent of keeping track on a daily basis. See cashflow forecasts.

Once you have a good sense of what is happening in your business, you can make plans that put you back in control. You can also adjust your business plan, forecasts and budget and check that your proposals make sense. It may be necessary to reduce the amount you take out of the business until profitability and cashflow improves.

It is important to keep your business plan and other documents updated, and refer to them frequently, so you can see whether your changes are having a positive effect. If you decide you need financing, any investor will want to see your detailed evidence of plans to improve the business. You cannot expect an investor to commit funds if you do not convince them that your business has a reasonable chance of success.

For more information see write a business plan: step-by-step.

If your business is finding it hard to pay its debts, you need to make sure you are collecting all the money that is due to you.

Have a system to quickly identify when payments become late and always chase them up. You have the right to charge interest on all late payments.

If you lose control of debts owed to you, then your debt-to-asset ratio will increase, resulting in most of your business assets being financed through debt. Your debt-to-asset ratio is your total liabilities divided by your total assets. If your business has a high debt-to-asset ratio it can be dangerous, especially if creditors start to demand repayment of debt.

Improving cashflow

There are lots of ways you can tighten up your cashflow and get your customers to pay on time:

• Payment terms - you need to agree terms and conditions with your customers that set out items such as credit limits and when you expect to receive payment. Having clarity on these issues makes it obvious when a payment becomes late. For more information, see invoicing and payment terms.
• Invoices - send out invoices promptly with all information clearly set out, eg amount due, payment due date. If you do not send an invoice, you will not get paid, and if you send an invoice with confusing information you are simply giving your customer an excuse to query and delay.
• Recovering debts - if you can't get your customer to pay you, there are a number of options available to you. See ensure customers pay you on time.
• Factoring - when trying to recover unpaid debt you can sell invoices to a third party, in a process called factoring. Another method of getting cash quickly is invoice discounting, which is only open to certain types of businesses. Both of these incur costs, but could be considered as a way to release capital. See factoring and invoice discounting.
• Credit checks - if you take on new customers to improve sales, make sure you run credit checks. You do not want to add a bad payer to your existing problems. See credit checking your customers and setting credit limits.
• Cashflow forecast - keep and maintain a cashflow forecast, so you know when money is due to come and go out of your business.

For more information, see cashflow management.

Overtrading 

However tempting it might be to attempt to turn your business around by simply pushing for more sales, you should first assess whether your cashflow can handle a sudden increase in trade.

If you take on more business than your cashflow or current assets can cope with, you could be at risk of overtrading. Overtrading occurs when you try to fulfil an increase in orders without having the working capital to cover the costs involved - eg overtime, extra stock and supplies - before the money from sales comes in. Overtrading is extremely serious and could cause your business to fail. See avoid the problems of overtrading.

Many things can change the market your business operates in, from new competitors and innovations to a general slowdown in the economy. If your business is in trouble, you could benefit from fresh information on your market, customers and potential customers. You might discover your sector has changed and that your lack of response has contributed to your problems.

Information sources

There are a number of places where you can get information, some of which are free, including:

• government reports and statistics
• local Trade Associations
• Chambers of Commerce
• local authorities
• commercial publishers of market reports

You could also do your own research, which will allow you to target the issues and markets you are most interested in. For more information, see market research and market reports.

Once you have some information about the way the market is moving, you can see whether your business could be made more competitive. If demand for your product or service is shrinking, you could consider diversifying into other areas where you have existing skills and technical expertise.

Customers and competition

An alternative strategy could be to exploit a currently underserved niche. Do your customers have any needs you could potentially fulfil? Is there anything you do particularly well that you could focus on?

Your customers are an extremely useful commodity. Take advantage of your existing relationships to see what they think of your business. You should also try to identify your most valuable customers and do more trade with them. Use the Pareto principle (often known as the 80/20 rule) - it suggests that around 80% of your profit is gained from 20% of your customers.

Changing your pricing strategy is another option. Raising prices will help your profit margin but total sales may fall, so re-emphasising the benefits of your product or service can offset the impact of a rise.

Cutting prices may seem counterintuitive but could encourage new sales. Be careful, however, not to let quality or service slip at the same time - see price your product or service.

One reason for your business having financial difficulty could be the entrant of new competitors into your market, or existing competitors expanding or doing something different. Find out as much as you can about what your competitors are doing and plan a response. Do not imitate them - they have already staked out that area of the marketplace - but select ideas that would work for your business and innovate.

For more information, see understand your competitors.

Making your business more efficient will save time and money. This is often taken to mean cutting costs but, while cutbacks can be a part of it, there are other routes you can take.

1. Business processes

Are all your business processes as streamlined as they could be? Are there examples of bottlenecks or duplication of effort? Talk to your staff, as the people doing the tasks regularly will probably have ideas for how they can be improved.

2. Cost-effective staff

Make sure you're getting the most from your staff. Do they all have the right skills they need to do their jobs? Are they motivated to do their best for your business? If they pick up on the possibility that the business might be failing, productivity may drop and valuable staff might leave. Bring them in on your plans early and ask for their feedback.

Sometimes you may have no choice but to consider reducing staffing costs, through reducing hours or making redundancies. Remember that making redundancy payments could increase costs in the short term, and may cause the remaining employees to feel insecure.

3. Reducing overheads

You can reduce overheads in other areas, like cutting back on advertising or purchases of new equipment. However, be wary of sacrificing long term investment for the sake of short term cost savings. For more information, see avoid insolvency.

You should also review your assets and consider whether any are surplus to requirements and can be sold to raise cash. This might include unused land or stocks.

You should consider reducing waste, write-offs and theft of stock. This is an area where most businesses can make significant gains in their gross margin percentage. See create a strategy to reduce business waste.

Theft can have a negative effect on a retail business' turnover - which could represent a significant potential increase in the gross margin if it is eliminated.

With those possible gains it is worth considering security measures, for example, mirrors, CCTV, or more staff on duty at peak times. Better stock management can reduce write-offs from having to offer a discount on unsold goods or throwing out perishable stock after its sell by date.

Occasionally the situation may require more radical solutions, for example, to avoid bankruptcy. If you need to restructure your debts, an Insolvency Practitioner can help you. For more information, see: 

• insolvency
• company liquidation 
• bankruptcy

There are several options to consider which may improve the profitability of your business, such as increasing trade or re-evaluating individual or entire financial aspects.

Whatever area you exploit, you will need to know your business inside out to improve performance and maximise the potential for profit. For more information, see strategies to improve sales and profitability.

How to check and measure profitability

Apart from ensuring your cashflow is under control, you must also regularly check your profitability.

The net profit is the amount of money left after paying all your bills. It determines how much money you can safely take out of the business for your living expenses and to pay taxes.

You will receive an annual set of accounts from your accountant. However this can be up to nine months after the end of the financial year. You need to check profitability much more frequently and more promptly, using monthly or weekly figures.

A good approximate measure of profitability is the gross margin. The gross margin is the value of sales less the direct cost of sales. So, if sales are £200 and the cost of sales were £120 the gross margin is £80 or 40% on sales. Gross margin is a unique basic comparison of differing businesses.

Secondly, to calculate the profitability of a business all you have to do is to deduct the business' overheads from the gross margin. So if the gross margin is £1,000 and the overheads are £600 the net profit is £400. Overheads tend to be fixed in the short term so gross margin becomes a good indicator of profitability and can be calculated quite simply.

For more information, see set up a simple profit and loss account for your business.

Alternatively, your accountant can help you set a basic measurement of your gross margin on a weekly or monthly basis. They can also help you understand other important ratios in your accounts.

Sometimes, despite all your best efforts, your business may fail. Rather than continuing to fight a losing battle and increasing your losses, it might be better to take a decision to wind up your business before you are forced into insolvency by a creditor.

You can either close down your business yourself or you can find someone willing to buy it from you - though, as you would be selling a failing business, this option is unlikely and you wouldn't receive much in return.

For more information, see consider your exit strategy when starting up a business.

You should write a plan outlining everything you need to do, including closing customer accounts, notifying staff and disposing of assets.

Tax implications

Regardless of how your business closes, you may still have to file Company Tax Returns and pay Corporation Tax and Capital Gains Tax.

If you don't have the expertise in-house, you will need to engage specialist professional advisers to make sure you notify the right people and complete your tax and other financial obligations.

HM Revenue & Customs provide further information on selling or closing your company and corporation tax.

Before you can make any change to your business, you need to identify where the problems are.

Look at your business plan and accounts. Where does reality not match up to what you anticipated? How long has the issue existed? Is it a temporary problem or something more longstanding?

Many businesses find it beneficial to use an accountant to work on their business' finances. A professional will be able to give you an insight into where your problems might be coming from.

Your cashflow is one of the most important aspects of your business. Without enough liquid assets to pay your bills, your business will fail. A cashflow forecast will give you a good idea of how much money you have coming in and out of the business, even to the extent of keeping track on a daily basis. See cashflow forecasts.

Once you have a good sense of what is happening in your business, you can make plans that put you back in control. You can also adjust your business plan, forecasts and budget and check that your proposals make sense. It may be necessary to reduce the amount you take out of the business until profitability and cashflow improves.

It is important to keep your business plan and other documents updated, and refer to them frequently, so you can see whether your changes are having a positive effect. If you decide you need financing, any investor will want to see your detailed evidence of plans to improve the business. You cannot expect an investor to commit funds if you do not convince them that your business has a reasonable chance of success.

For more information see write a business plan: step-by-step.

If your business is finding it hard to pay its debts, you need to make sure you are collecting all the money that is due to you.

Have a system to quickly identify when payments become late and always chase them up. You have the right to charge interest on all late payments.

If you lose control of debts owed to you, then your debt-to-asset ratio will increase, resulting in most of your business assets being financed through debt. Your debt-to-asset ratio is your total liabilities divided by your total assets. If your business has a high debt-to-asset ratio it can be dangerous, especially if creditors start to demand repayment of debt.

Improving cashflow

There are lots of ways you can tighten up your cashflow and get your customers to pay on time:

• Payment terms - you need to agree terms and conditions with your customers that set out items such as credit limits and when you expect to receive payment. Having clarity on these issues makes it obvious when a payment becomes late. For more information, see invoicing and payment terms.
• Invoices - send out invoices promptly with all information clearly set out, eg amount due, payment due date. If you do not send an invoice, you will not get paid, and if you send an invoice with confusing information you are simply giving your customer an excuse to query and delay.
• Recovering debts - if you can't get your customer to pay you, there are a number of options available to you. See ensure customers pay you on time.
• Factoring - when trying to recover unpaid debt you can sell invoices to a third party, in a process called factoring. Another method of getting cash quickly is invoice discounting, which is only open to certain types of businesses. Both of these incur costs, but could be considered as a way to release capital. See factoring and invoice discounting.
• Credit checks - if you take on new customers to improve sales, make sure you run credit checks. You do not want to add a bad payer to your existing problems. See credit checking your customers and setting credit limits.
• Cashflow forecast - keep and maintain a cashflow forecast, so you know when money is due to come and go out of your business.

For more information, see cashflow management.

Overtrading 

However tempting it might be to attempt to turn your business around by simply pushing for more sales, you should first assess whether your cashflow can handle a sudden increase in trade.

If you take on more business than your cashflow or current assets can cope with, you could be at risk of overtrading. Overtrading occurs when you try to fulfil an increase in orders without having the working capital to cover the costs involved - eg overtime, extra stock and supplies - before the money from sales comes in. Overtrading is extremely serious and could cause your business to fail. See avoid the problems of overtrading.

Many things can change the market your business operates in, from new competitors and innovations to a general slowdown in the economy. If your business is in trouble, you could benefit from fresh information on your market, customers and potential customers. You might discover your sector has changed and that your lack of response has contributed to your problems.

Information sources

There are a number of places where you can get information, some of which are free, including:

• government reports and statistics
• local Trade Associations
• Chambers of Commerce
• local authorities
• commercial publishers of market reports

You could also do your own research, which will allow you to target the issues and markets you are most interested in. For more information, see market research and market reports.

Once you have some information about the way the market is moving, you can see whether your business could be made more competitive. If demand for your product or service is shrinking, you could consider diversifying into other areas where you have existing skills and technical expertise.

Customers and competition

An alternative strategy could be to exploit a currently underserved niche. Do your customers have any needs you could potentially fulfil? Is there anything you do particularly well that you could focus on?

Your customers are an extremely useful commodity. Take advantage of your existing relationships to see what they think of your business. You should also try to identify your most valuable customers and do more trade with them. Use the Pareto principle (often known as the 80/20 rule) - it suggests that around 80% of your profit is gained from 20% of your customers.

Changing your pricing strategy is another option. Raising prices will help your profit margin but total sales may fall, so re-emphasising the benefits of your product or service can offset the impact of a rise.

Cutting prices may seem counterintuitive but could encourage new sales. Be careful, however, not to let quality or service slip at the same time - see price your product or service.

One reason for your business having financial difficulty could be the entrant of new competitors into your market, or existing competitors expanding or doing something different. Find out as much as you can about what your competitors are doing and plan a response. Do not imitate them - they have already staked out that area of the marketplace - but select ideas that would work for your business and innovate.

For more information, see understand your competitors.

Making your business more efficient will save time and money. This is often taken to mean cutting costs but, while cutbacks can be a part of it, there are other routes you can take.

1. Business processes

Are all your business processes as streamlined as they could be? Are there examples of bottlenecks or duplication of effort? Talk to your staff, as the people doing the tasks regularly will probably have ideas for how they can be improved.

2. Cost-effective staff

Make sure you're getting the most from your staff. Do they all have the right skills they need to do their jobs? Are they motivated to do their best for your business? If they pick up on the possibility that the business might be failing, productivity may drop and valuable staff might leave. Bring them in on your plans early and ask for their feedback.

Sometimes you may have no choice but to consider reducing staffing costs, through reducing hours or making redundancies. Remember that making redundancy payments could increase costs in the short term, and may cause the remaining employees to feel insecure.

3. Reducing overheads

You can reduce overheads in other areas, like cutting back on advertising or purchases of new equipment. However, be wary of sacrificing long term investment for the sake of short term cost savings. For more information, see avoid insolvency.

You should also review your assets and consider whether any are surplus to requirements and can be sold to raise cash. This might include unused land or stocks.

You should consider reducing waste, write-offs and theft of stock. This is an area where most businesses can make significant gains in their gross margin percentage. See create a strategy to reduce business waste.

Theft can have a negative effect on a retail business' turnover - which could represent a significant potential increase in the gross margin if it is eliminated.

With those possible gains it is worth considering security measures, for example, mirrors, CCTV, or more staff on duty at peak times. Better stock management can reduce write-offs from having to offer a discount on unsold goods or throwing out perishable stock after its sell by date.

Occasionally the situation may require more radical solutions, for example, to avoid bankruptcy. If you need to restructure your debts, an Insolvency Practitioner can help you. For more information, see: 

• insolvency
• company liquidation 
• bankruptcy

There are several options to consider which may improve the profitability of your business, such as increasing trade or re-evaluating individual or entire financial aspects.

Whatever area you exploit, you will need to know your business inside out to improve performance and maximise the potential for profit. For more information, see strategies to improve sales and profitability.

How to check and measure profitability

Apart from ensuring your cashflow is under control, you must also regularly check your profitability.

The net profit is the amount of money left after paying all your bills. It determines how much money you can safely take out of the business for your living expenses and to pay taxes.

You will receive an annual set of accounts from your accountant. However this can be up to nine months after the end of the financial year. You need to check profitability much more frequently and more promptly, using monthly or weekly figures.

A good approximate measure of profitability is the gross margin. The gross margin is the value of sales less the direct cost of sales. So, if sales are £200 and the cost of sales were £120 the gross margin is £80 or 40% on sales. Gross margin is a unique basic comparison of differing businesses.

Secondly, to calculate the profitability of a business all you have to do is to deduct the business' overheads from the gross margin. So if the gross margin is £1,000 and the overheads are £600 the net profit is £400. Overheads tend to be fixed in the short term so gross margin becomes a good indicator of profitability and can be calculated quite simply.

For more information, see set up a simple profit and loss account for your business.

Alternatively, your accountant can help you set a basic measurement of your gross margin on a weekly or monthly basis. They can also help you understand other important ratios in your accounts.

Sometimes, despite all your best efforts, your business may fail. Rather than continuing to fight a losing battle and increasing your losses, it might be better to take a decision to wind up your business before you are forced into insolvency by a creditor.

You can either close down your business yourself or you can find someone willing to buy it from you - though, as you would be selling a failing business, this option is unlikely and you wouldn't receive much in return.

For more information, see consider your exit strategy when starting up a business.

You should write a plan outlining everything you need to do, including closing customer accounts, notifying staff and disposing of assets.

Tax implications

Regardless of how your business closes, you may still have to file Company Tax Returns and pay Corporation Tax and Capital Gains Tax.

If you don't have the expertise in-house, you will need to engage specialist professional advisers to make sure you notify the right people and complete your tax and other financial obligations.

HM Revenue & Customs provide further information on selling or closing your company and corporation tax.