News Releases
|
 |
Why businesses fail (and how to ensure yours won't!)
Published on: 22 May 2007
An increasing number of small and medium sized businesses are expected to fail in 2007. When businesses fail, too often it's because management didn't spot the warning signs early enough to take remedial action. There are 10 key signs business owners should be wary of that could indicate their business is about to enter the danger zone:
Lack of working capital. If you are winning contracts but struggling to fund them or having to chase debts early in order to pay your suppliers, then cash flow is becoming an issue.
Straying from the principles that led to your success. Allowing the quality of your products or customer service to slip, or focussing too closely on how to spend your profits rather than how to grow them can lead to trouble.
No contingency plan. Every business needs to protect itself and plan for the worst. Ensure you have sufficient insurance and any vital data is backed up and stored off-site. Contingency plans must take into consideration any major incident or sudden movement in market forces that could have a serious impact on your business.
Change in senior management. If you are passing the reins to inexperienced family members or stepping back to allow managers to control the day-to-day business this can have a significant impact on staff morale, quality of output and therefore profits. Make sure the new management structure is supportive of your future business goals.
Failure to review pricing. Pricing must be reviewed regularly to take into account changes in the market, new technology reducing your labour costs, supplier and competitor pricing and the state of the current labour market.
Fingers in too many pies. If you're diversifying away from your area of expertise, overstretching your finances or spreading your management team too thinly, the established areas of the business could be compromised by hasty expansion.
Staff morale low and turnover high. If you neglect staff development, benefits and conditions or give your staff too little or too much responsibility, your business could be in danger. High staff turnover leads to high recruitments costs and increased training time. Lack of investment in staff leads staff to invest less effort.
Debtor Delays. A major danger for business is failure to collect what is owed to you. If you are lax in setting credit limits, don't invoice promptly or carry large debtor balances from late payers, your cash flow is at risk.
All of your eggs in one basket. If your business relies heavily on just a few suppliers or one or two key customers then it's difficult to make objective decisions. Key clients can often dictate their own prices so be wary if more than 80% of your revenue is generated by less than 20% of your clients. Be careful also if the efficient running of your business depends heavily on just a few key staff members.
Your finger has slipped off the financial pulse. Poor accounting often leads to poor management decisions so ensure you are getting accurate information. You need up-to-date financial systems, the appropriate advisers on board and a management team who provide you with accurate and timely information.
If you're afraid your business could be slipping into the danger zone, then the time to get help is now. Finding a trustworthy Insolvency Practitioner who focuses on Business Rescue should be your first step. Two case studies provide good examples of what can be achieved:
Raising Finance to Save A School
David was the bursar of an independent secondary school with a major problem looming. Three years previously, the school had acquired a failing junior school. Whilst the management team had successfully increased fees and pupil numbers, the junior school had to relocate as their lease was not being renewed. Unable to find existing buildings, David was forced to consider building beside the secondary school. Since this was a listed building in a green belt area, the planners were insisting on an expensive specification that looked likely to cost around £2.5m. The build would take 12 months. David had only £0.5m available and was faced with disappointing 140 sets of parents if the school had to close.
A local business recovery firm, Portland, quickly reviewed the position and decided that the school, a charity, should borrow £2m. Unfortunately the repayments would be much more than the school could manage so Portland prepared a business plan for lenders that illustrated how increasing fees and pupil numbers together with sensitivities on interest rates would make the school a good risk. The bank agreed, the money was lent, the building was built and the junior school is now operating successfully.
Focus on cash, not Profit
Ian owned a wholesale business distributing scented pot pourri products, many of which his staff assembled in-house. He had won contracts from many store chains, negotiated good margins and operated from a low cost facility so he was highly profitable. So why was he always short of cash with the bank breathing down his neck?
Portland, a business recovery firm, examined Ian's production and cash collection processes. It became clear that Ian bulk purchased to obtain discounts which led to large quantities of stock being assembled and stored. Ian paid his suppliers promptly but unfortunately, at the other end, invoices were slow to be raised and often missed his customers' accounting period dates. Late payments were not being chased effectively.
Portland helped Ian to streamline his processes. Ian could offer customers incentives to order well in advance so that he could plan effectively and store less stock. Portland pointed out what Ian already knew (but was finding difficult to accept) that some of the slow moving products needed to be stopped and existing stock realised by special offers.
Portland then helped to train the sales force and credit controller to deal with large and bureaucratic customers more efficiently.
|
|
Print this page ]
Back