FAILURE: LOSING MONEY BY THE BUCKET LOAD

Ten Most Common Causes of Business Failure, and how to avoid them.

1. CASH FLOW PROBLEMS

Cash is the life-blood of any business. No cash - no business. Many concentrate on making profits, but profits are not much use if they are tied up in the business. A cash flow problem is very easy to recognise. Avoid business failure by improving Cash Planning and Control.

2. LACK OF CAPITAL

Most new companies are under capitalised which is difficult to correct. Be clear about how much money will be needed to fund the operation of a business for the first year at least. Another key tip is to discount even further your expectations of cash inflows.

3. LACK OF CURRENT REGULAR FINANCIAL INFORMATION

Reliance on Annual Audited Accounts is inadequate because of their historical nature. The use of current financial information to predict difficulties in the coming months and taking corrective action is vital. Perfect the knack of having key “red hot” financial indicators (monthly turnover, gross profit & net profit margins, debtor/creditor/ stock days, bank balances and taxes outstanding).

4. THE BIG CONTRACT – "THE ULTIMATE DREAM!"

Resist taking on a contract or “Line of Work” of such size that if anything goes wrong during the contract, the entire business is mortally wounded, this involves great strength of character! You may also risk losing contact with other customers if the contract is of very long duration. It is wise to know exactly how the business was won.

5. SMALL CUSTOMER BASE

Beware of over reliance on one or two large customers. If they go, you go. Broaden your base of activities to avoid relying on one or two large customers or suppliers.

6. OVERTRADING

This occurs when a business expands faster than its capital base and eventually the business cannot meet its commitments. Ensure cash reserves or profits increase at the same rate as or higher than turnover, working capital requirements, bank loan and interest payment increases.

7. COSTING AND PRICING

These are separate subjects that are inevitably linked by the end profit result. It is essential to know the real cost of producing your product or service. If prices are too low expenses will not be covered, if prices are too high sales will be lost.

8. INABILITY TO GENERATE SALES

The inability to generate sales is a major cause of business failure. Little or no market research is a contributing factor to sales not being achieved to plan. It is essential to research and know your market. Ask yourself: Do you really understand the market you are in? Do you know your target customer groups? Do not underestimate the power of marketing and research – both will help with your sales plan.

9. PRACTICAL PLANNING FOR GROWTH

Management should have sufficient understanding of the financial implications involved in strategic and marketing decisions. Decisions made in isolation can result in disappointing bottom line results at best, or cash flow shortages, overtrading and eventual collapse, at worst. Growth will also result in a decrease in time available making everyone busier!

10. EXCESSIVE PRESONAL DRAWINGS

A proprietor and his/her family living beyond their means is a threat to a business, this is a problem that most family businesses suffer from. Personal drawings should not exceed profits under any circumstances. The prudent businessperson should ensure sufficient profits are retained in the business for future developments.

Courtesy of Certified Public Accountants (CPA’s) bulletin for SMEs entitled, ‘Understanding the Pitfalls of Small Business.’ For copies of the bulletin, T: 01 676 7353; E: cpa@cpaireland.ie or contact the Small Firms Association, T: 01 605 1500; E: info@sfa.ie