One of the hardest lessons to learn is that although we all feel our businesses are unique, in fact they all suffer from the same problems. Sadly, businesses fail and face going into administration for many of the same reasons.
If your business is to avoid liquidation or a company voluntary arrangement then these are the top ten things to avoid.
- Financial awareness – often business owners will be experts in their particular field but fail to get a grip on the essential truth of owning your own company. It’s all about the money. As a business owner it is your responsibility to understand what is going on, who owes money and who is owed. Time and again firms go into receivership that could otherwise have done very well if someone just had a handle on what was going on with the money.
- Under capitalisation – we are all guilty of being over optimistic. Think about the last time you refitted the kitchen or decorated the lounge. It probably cost much more than you expected and after a while you chose to stop counting! So often this happens when people start a business, they are over optimistic with the start up costs and the cash flow forecast and fail to ensure that they have enough of a cash buffer.
- Lack of potential – You may feel that the world has been waiting for a chocolate fireguard and you’ve canvassed all of your friends and relations and they all think you’ll make a million. Unfortunately the rest of the population isn’t convinced and the simple truth is that there will never be enough demand to make your product viable.
- Lack of flexibility – during the life of a business demand will wax and wane and although you may be living off the fat of the land this week, building in a decent amount of flexibility to your cost base will ensure that when that big customer finds a new supplier you’ll be able to scale back your operations until you find others.
- Ignoring the 80/20 rule – also known as Paretos law (after Vilfredo Pareto) it identifies that 80% of a particular result will be caused by 20% of the activity. As an example 80% of sales from 20% of the clients. Firms should beware when more that 80% of sales come from less than 20% of customers or when more than 80% of receivables is owed by less than 20% of the debtors. Using the 80/20 rule in all areas of activity highlights things that may need attention.
- Inefficient operations – Most people believe that they are above average drivers. Clearly this can’t actually be true. Similarly most business owners believe their operations are above average efficiency but the truth is that most companies could do things quicker or cheaper. Ignoring operational efficiency means that your competitors could steal a march by supplying your customers quicker, cheaper or more effectively by being more efficient than you.
- Lack of environmental awareness – we’re not really talking global warming but more the environment that the business operates in. For example think of the way things have changed for book shops, music stores and photo developers. Scanning the business environment for risks and opportunities is vital if a company is to survive.
- No succession plan – a firm needs not only a plan for how the company will be passed on to the next generation but also a clear chain of command in case a key person is unexpectedly out of the business for a significant period. If these things aren’t thought about in advance then when someone is off sick long term then customer service can suffer through something as simple as a lost password.
- Overtrading – a very simple way for a company to find itself in the hands of the official receiver and the most annoying. Overtrading is where a firm does too well. Selling too much means that customer service can suffer with a resulting damage to the company reputation but also means that the firm can run out of cash as it tries to buy more stock but has to wait for payment from customers.
- Closed mind – owners that won’t listen to others’ opinions or refuse to look outside of their own experience tend to result in firms that stagnate and eventually go into liquidation. It is vital that a firm has a good influx of new ideas and opinions to keep it fresh and efficient. This also allows them to offer a better and more up to date services to their clientèle.
Companies that end up with a winding up order generally don’t do so because they are unlucky. Usually it turns out that they have fallen foul of one or more of the above issues. Making sure that you don’t commit these mistakes won’t guarantee that your business will be successful but it will lessen the chances of going into receivership.