We’ve all heard the statistics …
According to the Australian Bureau of Statistics, more than 60 percent of small business cease operating within the first three years of starting.
43% of one-person businesses which existed in 2011/12 were gone by 2015/16.
According to an ASIC report on corporate insolvencies, small businesses (less than 20 employees) cited the following reasons for failure:
Inadequate cash flow or high cash use (46% of reports)
Poor strategic management of business (46% of reports)
Poor financial control including lack of records (34% of reports)
Being a business owner is not an easy gig.
So how do you turn the tide in your favour?
The key take away from the ASIC figures show the key causes of business failure are:
Poor record keeping
Cash flow management.
To avoid becoming one of the statistics, here are some of the things you should consider when managing your business:
1) Cash is king
Cash flow is THE MOST CRITICAL thing for your business. Cash is the lubricant that allow your business to run smoothly, and it is the oxygen that allows your business to live and breathe.
I’ve written previously about some of my previous clients boasting about their sales, but the reality is that if you fail the collect the cash, then it’s all for nothing.
Minor changes to the way you manage your debtors and being smart about the way you manage your inventory are just a couple of ways to inject thousands of dollars into your bank account through working capital savings.
2) Data is everything
If cash is king, then data is it’s queen. Data may not be the sexiest thing in the world, but the decisions you make will only be as good as the information you have.
As a busy business owner torn in a thousand different directions, the last thing you want to think about is orderly record keeping. Yet evidence shows that it is crucial for your business survival.
Think about your processes - are there delays in data entry? How up to date is your information? Are their any checks or controls to make sure mistakes are kept at a minimum? You can have the most expensive system in the world, but if garbage gets entered in, guess what you’re decisions is based on?
And while your gut instinct can play a significant role, the numbers - in all their black and white glory - can be the very thing that will either confirm your hunch, or they can save you great deal of heartbreak.
3) Time is of the essence
Back in my cash flow finance days, we expected clients to be provide their monthly accounts within 30 days - ancillary reporting due even earlier - on the premise that if something was going wrong, we’d be able to identify it early enough and investigate.
It should be no different for you as a business owner.
By keeping a close eye on what sells, what expenses are blowing out, which client hasn’t paid etc. you will be on front foot - enabling you to make changes, or proactively tweak your strategy to capitalise on opportunities and tackle issues before they become chronic issues.
4) Diversify your customer base
One of the biggest red flags when I did risk assessments on businesses in my banking days were clients that relied on 1-2 customers for more than half their business income.
What would happen if those clients failed and their businesses folded?
What happens if those customers went to your competitor?
Don’t let your business rely on just a few client. Reduce your income risk and future proof yourself by broadening your customer base. Think about ways you can keep yourself relevant to your customer’s needs to retain existing customers while attracting new customers.
5) Growth vs Quality
As demands for your business increase, without the proper systems in place, you’re putting yourself at risk of failing to meet customer expectations because your support structure is unable to sustain sudden increased demand.
The adverse effect on your business reputation may be irreparable, which is why it is crucial for you to scale up your business without sacrificing the qualities that made you such a hit in the first place.
6) Know what numbers to look at
Sales may not always the best number to look at, and the key critical numbers can vary for different businesses. Think about what drives your business:
Do you have to maintain a certain margin on sales?
Are you subject to market prices? e.g. airlines are tied to fuel prices, coffee shops are tied to coffee prices, some gas producers have contracts are linked to oil price.
Do you need to keep your costs at a certain metric e.g. restaurants and food costs, retailers and their profit-to-square-metre.
How much did those sales cost you? Did you pursue growth at the expense of profit?
How much cash from those sales did you collect?
What was your performance compared with the same time last year?
Tracking month-on-month (and comparing performance to the same time last year) enables you to develop a yearly trend to help with your cash flow planning. Some businesses make most of their money in the summer months, and I’ve managed retailers who did most of their yearly sales in two months of the year.
Regularly tracking your performance means you can adapt your strategy if economic environment wasn’t the same as last year before it hits your profit line hard (hence the need for timely, accurate information). It also enables you to identify inefficiencies in your business as they’re likely to be dragging your profit down.
7) Embrace your strengths and know when to ask for help
From hiring employees, staff training, HR, running finances, marketing, paying bills, and actually doing your ‘real’ work, business owners are pulled in a million directions and forced to do things outside your natural area of expertise.
While we all roll up out sleeves and take on things we’re not necessarily confident at, if you feel completely out of your depth with, consider getting help with specialised functions:
You’ll you save yourself potential heartbreak - including financial loss - if something goes wrong because you took a punt (we’ve all done it).
A 3 minute conversation can save your hours of work (that time would be better spent doing something you’re great at, like drumming up new business).
Your specialist brings years of experience in their area of expertise and a fresh perspective to your business.
You’re not alone
Owning your own business is all consuming, sometimes vacuous experience leaving you unable to see the wood for the trees. But there are plenty entrepreneurs that have gone before you, so take benefit from their experience. Just remember that you can’t read the label when you’re inside the jar.
Your bottom line with thank you for it.
If you have any questions, shoot me a message. If you'd like some help putting the right processes in place to ensure your business is around for the long term, book in for a free 15 minute consultation.