7 Tips to Avoid Business Failure
In my last article, Are you a Lemming or a Leader, I talked about the potential opportunity to grow your business by ‘swimming against the tide’.
At the same time, I alluded to the potential risks of growth.
Over the years, I have seen many businesses experience stress. Usually there are a variety of reasons for the stress and often a number of separate events happen at the same time. I’ll go into some of the reasons a bit later.
Interestingly, my experience with distressed businesses is not in the area of ‘new businesses’. More often than not, the business has been in operation for a number of years and is (or has been) successful for the majority of its existence. I’m not sure whether this is reflective of the market, it’s just my experience.
The one common theme with all of the stressed businesses that I have dealt with, is that behind the business, there are directors/ business owners who are under enormous stress. More often than not the directors or business owners not only have their personal assets at stake, they are also acutely aware that there are employees and suppliers that are dependent on the business. The effects can be far reaching.
As previously mentioned, there’s usually a number of factors that contribute to business stress. Sometimes there’s a single catastrophic event, however, in my experience, this is rare.
I thought I would list some of the reasons for stress that I have observed. This list is not intended to capture all of the reasons, it is simply a summary of some of the key themes:
Collapse of a major debtor – this one falls into the category of a single catastrophic event and often can bring about a chain reaction of company collapses.
Rapid growth with insufficient access to cash flow or working capital facilities
Reducing sales – this can be for a variety of reasons such as competition, changes in demand or bad sales/ marketing practices.
Poor understanding of cash flow – leading to over investment into personal assets or over investment into fixed (non-income) assets
Insufficient working capital to cater for seasonal variations
Diversifying into an unrelated business line.
Over investment into inventory/ slow inventory turnover/ obsolete stock.
So how is it that you can have two companies in the same industry (experiencing the same broad issues), one survives and thrives, the other fails?
Sometimes it’s luck, mostly it’s good planning.
The business that survives always has a strong understanding of risk and they take measures to protect themselves. Taking the above points as examples:
They protect themselves against significant debtor exposure in a variety of ways
They understand that growth often consumes cash. They budget properly and make sure that they have adequate access to working capital to not only fund the growth but also to cater for any delays to income
They understand that sales are the lifeblood of business. They have a strong marketing program and they innovate to ensure that their product remains in demand
They understand that a suitable level of profits need to be retained. They also understand what profits can be paid out (or invested into fixed assets) because they have done the right level of budgeting (refer point 2)
They understand that business can be cyclical and ‘stash-cash’ when times are good
They critically analyse the desire for diversification. If it is to ‘paper over’ problems in the original business, perhaps the effort would be better focused on fixing the issues in the original business.
They maintain rigorous inventory controls and liquidate old or obsolete stock.
Clearly this article simplifies the issues. Risk management is not necessarily easy and risks are sometimes difficult to identify ‘in the moment’.
Risk management should be viewed as part of the strategic planning process and should be reviewed at least annually. After all, the difference between success and failure can often be acceptance that risk exists and protecting against the risk. Surely that is worth the investment in time?