Failure is not usually an option considered by any business owner. Unfortunately hundreds of Australian businesses collapse each year, resulting in millions being owed to creditors. And out of those hundreds, small businesses are more likely to crash than their big brother counterparts. So how can you avoid failure? Watch out for these following warning signs to ensure your business avoids an untimely demise.
- Revenue Drop
Knowing your businesses finances is crucial to any operation; therefore poor financial metrics should be the first sign that something isn't quite right. Companies inevitably go broke for a number of reasons, including lack of profitability, poor cash flow management, poor accounting, bookkeeping and record keeping.
Where a drop in revenue occurs, this makes it harder to keep up with costs that are obligatory such as superannuation payments, tax payments and even wages. If you find yourself in a situation where you are constantly delaying payments or drastically cutting costs in a bid to break even then it might be worthwhile taking a step back and realising that these are all warning signs that shouldn't be ignored, especially since these types of signs often start to appear quickly, between two to six months and can escalate just as rapidly.
- Cash Flow Problems
This warning sign really coincides with point #1. Once you experience a drop in revenue, whether it's due to factors outside of your control such as a downturn in trading conditions or the market - the cash flow of the business will subsequently become affected.
Businesses that are unable to collect debts owed to them or pay creditors usually leads to a chain of events that can often unsettle a business pretty rapidly. Businesses that rely on one or two main clients for most of their revenue also often find themselves hard-pressed when something happens to that client and wrecks havoc on their cash flow.
Another issue with cash flow is that some businesses may not even see the problem before it's too late. If your business is "growing broke", meaning sales are going up and profit may be up but the working capital terms are very long or the business isn't collecting revenue then this is also a cause for concern. The business may be profitable but there is no cash to play with. Owners should be well aware of the difference between profit and cash.
- Obscure Accounts
As stated in point #1, business owners need to know their accounts. All too often we find clients who lack any sort of basic understanding of what is going on with their books. At the very least, business owners need to understand their profit and loss statements and the overall state of their balance sheet to avoid financial strife.
These financial statements display the life of your business and indicates whether there is a problem with your cash flow cycle. Unless you, as a business owner are monitoring that, you are potentially in strife. A quality bookkeeper, accountant and administration practices also help towards running your business but nothing can take away from an owner being able to decipher through their own financials.
- Poor Management
Another reason why businesses collapse has to do with the running and management of the people within the business. All too often a company director will blame the breakdown of the business on financials, but that is looking at the symptoms, not the cause.
In the vast majority of cases, poor management is the cause; business owners will often see when their company is in trouble and will try to work harder or pitch to the next big job to keep things afloat. The problem with this situation is that whilst the director is actively working harder, they are also averting their eyes from what's really going on. They will stop doing things like reviewing monthly forecasts and operation problems and just hope that their luck will turn with an increase of income to get them through to the next hurdle.
- Delayed Responses
Many businesses fail to take significant action to address problems as soon as it is necessary. The directors or management team may recognise that the business is encountering a problem but they are not ready to initiate changes. Often executives will talk about making small incremental cuts, instead of a large overhaul all at once. The problem with this is that it shows an aversion to making big, usually difficult decisions and that can be an indicator in itself.
How to fix it
There are certainly ways a business can avoid failure. The key is to act quickly and early. This doesn't mean that you have to work harder. It means you will need to work more strategically. Take a step back and figure out what has changed, what has gone wrong and come up with something that actually changes the way the company is operating.
Businesses also need to have protocols in place prior to trouble times; so when these warning signs start to appear, they are sufficiently prepared and they are able to act swiftly and avoid any potential issues from the beginning.
If your business does slide into insolvency, you must act immediately and you will almost certainly need outside assistance. Major companies like Pie Face and Bevilles have faced closure of late and they have in fact been able to pull themselves out of the brink of collapse so it certainly isn't impossible; it is just easier to implement strategies in the first place that prevent the problem, than having to fix a major problem in the long run.
For more ways on how we can help your business or for our Business Coaching services, contact us on 02 9299 7044 or via email@example.com.