Are you another Thomas Cook waiting to happen?

The stories about what happened and why, are dominating the news, along with the horrendous impact this is having on their customers and suppliers. As an accountant, I would suggest the culprits are two-fold and the purpose of this blog is to help you – by shedding light on them – so you don’t find yourself following the other countless businesses who go bankrupt every day; it’s just the big ones that make the headlines.

What are the two primary reasons for bankruptcy?

1. Change

2. Debt

Change is a given in any business. The news reports are suggesting Thomas Cook suffered due to Brexit, two fairly hot UK summers, budget airlines and the ability to book accommodation directly. These are all things that have come about due to change, some natural, others manmade, but change nonetheless. We can do nothing about change except embrace it, fight for what path we think it should take and embrace ourselves for the ride. Debt, on the other hand, we can do something about.

Debt is a choice but it is often deemed necessary to run a business. Whilst debt can be useful for business growth, it comes at a high price. The most obvious cost being interest and charges. For example, it can be seen on Thomas Cook’s 2018 annual report that their finance cost was £150m.

However, a less obvious cost is the risk businesses are taking when they choose to pay today’s debt with tomorrow’s money. This is why some businesses can endure a change in their industries easily where others crash and burn. Examples include invoices paid from next month’s sales, tax bills paid from next year’s sales and/or loans paid from the next four year’s profits.

I suggest only using a supplier’s credit facility when you give credit to your customer, then pay the invoice when you’re paid from your customer and put aside approximately 10-15% of your revenue each month for tax until you can calculate with more accuracy. Furthermore, if applying for a loan ensure you have assessed all risks and that you can easily repay if any conditions you are relying on were to change.

Change is inevitable, debt is avoidable.

By Helen Monaghan

Chartered Management Accountant and Author of 12 Steps to Improve Your Cashflow, Successful Business Minds, and The Magical Mix of Money & Tax.

© HM Finance Coaching Ltd