Andrew McBarnett FCMA CGMA shared a link.
Why is there such a high rate of failure among small businesses?
Bloomberg states that 8 out of 10 entrepreneurs who start a business fails within the first 18 months – a failure rate of 80%!
Small businesses accounting for 99.3% of all private sector businesses in the UK and 99.7% in the US is a major factor, but more importantly is the problems faced by small business due to cashflow and poor financial management.
We are well aware of the economic downturn since the Financial Crisis in 2007/8 and are now being encouraged by the news that recovery is on the way. Unfortunately for us, small businesses suffer these effects more than our larger counterparts. As they usually have larger buffers in terms of cash, stocks etc. to save for a rainy day.
But It Can’t All Be Due To The Downturn
In a recent study by Entrepreneur.com, they found that the reason why US small businesses fail was:
So How Can These Issues Be Addressed?
A critical discipline that must be adopted is having a sound credit management system. Business can’t fail through a lack of profits but they can through a lack of cash.
This is made far easier by having a computerised accounting system and instead of waiting until the debt is overdue to find out that there is a problem, implement a system whereby you invoice as soon as possible and remind, remind, remind until you are paid.
A computerised system can not only provide you with the minimum financial information you legally require, it can also provide useful management data that will make running your business far easier.
It can help you forecast by providing trends, margins and plan, whilst giving you useful information to aid your decision making. In a CIMA study 54% of businesses stated that their accountant failed to assist with the strategic development of the business, a management accounting system can.
We cannot leave it to factors outside our control to determine the future of our business; the main driver must be the owners/directors.
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According to the USA Today, 4 in 5 US businesses will not be around to celebrate their first-year anniversary.
As you can imagine, businesses go under for a variety of reasons; lost orders, poor forecasts, bad or no controls, no cash, litigation, the list is endless. Where there’s a business activity, there’s a potential reason for failure.
No business performs according to plan each and every day so why doesn’t the owner see the warning signs?
They usually do, but in the case of the businesses that I have been advising, they either ignore them, hoping that they would go away, or they simply see them far too late.
Addressing The Cause
And acting isn’t good enough if you don’t address the cause of the problem. Ploughing more of your own personal funds into the pot to sure-up the cashflow won’t help. You must reduce your outflows because the problem will return to haunt you in weeks or months to come!
Is cash the first of the alarm bells? I would argue that it isn’t.
Your staff should alert you where there’s a problem, for example credit control may alert you that a customer is not paying, or your accountant may notify you that profit margins have fallen.
Not Getting Paid
How can you remain cash positive if you are not receiving the money you are owned, or making enough profits in the first place?
OK, so you have a problem and several months later it’s still there, you take your head out of the sand and decide to do something about it.
You ask yourself “have I got the necessary skills or experience to resolve the issue?”
The clock is ticking, you can’t delay paying your suppliers, you’ve had final notices and more importantly pay-day for your staff is just around the corner, so what do you do?
I would suggest you turn to a professional, a specialist like a company doctor, who has the experience to help you turn the ship around before it runs aground.
There will be some of you out there thinking, I have managed this business for years; it has grown from nothing to where it is today, why do I need help?
The simple answer is that at certain stages of any business’s life it will need outside help, whether it is a loan to purchase new equipment, legal advice, who knows…
No-one will question what you have done, the past does not matter, what is important is that your business has a future.
Imagine on the football pitch, a player gets injured, he doesn’t treat himself, he calls on his medical team to ensure that his career and future is not jeopardised and that is what you may need to do.
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