Why do businesses fail?
This is the single most important question any entrepreneur should ask and know the answer to. However, the fact that 80% of new businesses fail within 18 months of starting* is a clear indicator that most business people do not know the so-called secret to success.
Cash is King
There are in fact three core reasons why each and every business fails: cash flow, cash flow and… cash flow.
It’s simple – if a creditor cannot be paid for want of a lack of ready cash the business will fail. So this poses the following question:
How can cash flow issues be avoided?
1) Manage Outgoings with Spend Management
This is probably the most important factor in ensuring good cash flow. The rationale is simple: money which has left a company cannot be used to pay creditors. Companies will often focus on ensuring that they have a robust system in place for inventory replenishment resulting in getting the best possible deals from vendors. Whilst this is important, companies often make the error of turning their backs on indirect spending i.e. company spend that does not directly relate to the goods or services sold by a company. The Hackett Group estimates that maverick indirect spending accounts for around 2% of total company spend which is a significant amount for small and large companies alike to absorb. This type of spend can quickly spiral out of control without effective management and tight controls.
2) Keep an Eye on Profits
It’s often easy for businesses to fall into the trap of focusing on turnover rather than profit. It’s a famous saying but oh-so important – turnover is vanity but profit is sanity. Sure, profit isn’t essential in every stage of business (particularly if a company is in high growth mode) – however, eventually every business will need to turn a profit if it is to survive in the long run (capital investments and cash reserves will dry up and creditors will still need to be paid). Ensuring a company makes a profit in the long run will help ensure that cash is available when required
3) Organize Books
This seems obvious but disorganized books can kill a company. Most entrepreneurs detest bookkeeping and often place the task at the bottom of their to-do list. However, such procrastination can be a significant error as without organized books a company cannot obtain an accurate snapshot of it’s financial state. If a company doesn’t know of its immediate financial health it means that it’s impossible to forecast and plan effectively. This will inevitably result in cash being unavailable when it’s needed the most.
Is it too late?
In short, no.
If a company is still operational steps can be taken to ensure that it doesn’t fail. Keep it simple: keep an eye on profits, control money exiting the company and ensure that it’s all documented in a timely and accurate manner. This will help maintain a healthy cash flow, keep creditors at bay and ensure that the company survives and thrives in the long run.