Business Failure: Why Does It So Easily Happen?
Because they forget that cash is king ...
POSTED BY JONATHAN VOWLES ON 17/09/2019 @ 8:00AM
In the last 21 years or so, I have only met a couple of companies that became business failures because the owners were lazy or inept ...
Business failure happens when owners forget that cash is king!
copyright: ocusfocus / 123rf
The vast majority of business failures have been for one basic reason ... they ran out of cash. I repeat this phrase over and over to every business owner I know, "Cash is King!" It's one of the most popular sayings from the 1970s and the rise of the Business Schools.
"But just because it is an old saying doesn't make it any less important to your business today!"
In fact, it might be even more important now in 2019. It's a bit simplistic to say that the business failed because it ran out of cash; that is the symptom rather than the cause. You need to look at things more deeply.
For example, there was a company that had a management buy-out using borrowed money. They collapsed 12 months later because they didn't borrow enough money! Simple in retrospect, but the problem was that the big four accountants that advised them forgot to ask how much money they needed to cover the wages and rent if the business didn't do very well in the first year, so they only borrowed enough to purchase the company.
"The advisors were blinded by the glow from their rose-tinted spectacles when they looked at the cashflow forecast!"
Another business I was called in to help with were sure they had a credit control problem, and that was why they were running out of cash. Actually, their credit control was pretty good, but the problem was two-fold: firstly, they didn't have great profit margins and secondly, the director was spending what profit they did make on non-essential stuff!
Then there was the business that was busy, but never had any money in the bank. When I looked at their costs, I pretty soon realised that they were VAT registered, but hadn't put their prices up by the 20% they owed the VAT man when they went VAT registered. This meant that they were suffering a reduction in profits. The answer was to put their prices up!
Then there was the fast-growing business that doubled their sales turnover every six months, but growth is expensive when your customers take two-months to pay. They needed to find a funding source to help with their growth.
What does this mean for you?
Make sure you get the right information from your management reporting
Think about the problems as well as the successes
Borrow more than you need, not just enough
Plan a way around running out of cash
Look at your cashflow forecasts and plan ahead to get funding
Remember, your accountant should be a helpful friend, so if you'd like to find out more about how to stop a business failure, ways to improve your cashflow or even to just have a chat about your business's future, do give me a call on 01234 752 566 or click here to ping me an email and let's see how I can help you.
Until next time ...
More about Jonathan Vowles ...
I've been an accountant in and for business since 1987 and have a wide experience of consultancy, audit, accounts, taxation and wealth planning work from individuals and small businesses to multinational corporations and charities.
My eclectic interests in growing and developing business span a number of areas, which can be summarised as strategic business advice and tax saving advice.
I have worked with the Chamber of Commerce to deliver courses for people about starting up in business and have lectured about tax for a major accountancy practice and for Milton Keynes College.
I relax by reading fiction and by getting away from the office in a campervan.
More blog posts for you to enjoy ...