Tag Archives: Red flags

Red flags (Part 2): Non-financial reasons why small businesses fail

A3Small businesses usually fail due to a combination of financial and non-financial reasons. The good news is that these risks can be addressed before they become a threat to the survival of the business. This article will discuss a number of non-financial risk factors that could lead to small business failure if not addressed in time.

  • Lack of planning 

Business plan:

Few small businesses have business plans or if there is  one, it often ends up forgotten in a bottom drawer. To be of any real value, a business plan needs to be flexible and reviewed occasionally to determine if the business is still moving in the direction that the owner originally planned or if a change in direction is required.

Succession plan:

An up-to-date succession plan is vital to ensure that the business can continue if something unexpected happens e.g. losing a key employee.

  • Marketing considerations 

Target market:

It is crucial to define a target market to ensure that advertising is done through the right channels to reach the target market. The owner/management must stay in touch with changes in the needs and wants of their target market. Every now and then the business should re-assess whether the demand for their product or service is growing, declining or stagnating, and whether their target market has perhaps changed. 

Customer base:

The risk of having one big customer is that losing them might mean closing down the business. Having a large base of small customers in addition to one big customer is much safer. 

Focus on products:

Effort should be focused on marketing the most profitable products or services. This means information on how much profit is made on each transaction should be available. 

Advertising channels:

Today every business probably should have a website and use the same social media platforms e.g. Twitter or Facebook, that their target market uses. If not, you will lose clients to your competition who does make use of these resources. 

Overgeneralisation:

One business can’t be/do everything for every customer. Spreading yourself too thin can diminish the quality of service delivery.

  • Inadequate management skills and experience

Lack of management skills, experience and knowledge of the business sector in which a business operates is a major cause of small business failure. If not addressed in time, poor communication skills and lack of adequate procedures and systems will be a factor that increases the chances of business failure.

  • Unexpected and uncontrolled growth

A growing business can expand beyond the management resources and skills available in the business. If a current employee’s ability to manage and plan becomes insufficient due to the growth of your business, re-training the employee so that he/she is able to meet the changing demands of their work, or appointing a more qualified person should be considered.

  • Incompetent personnel and poor service delivery

Repeat and referral business is where the big money lies. Customers who had a bad experience in dealing with your business, will probably not return and tell other potential customers about their negative experience.

Develop strict guidelines when hiring personnel and put new and old personnel through intensive training to ensure quality service delivery from each employee. The success of a business depends to a large extent on the owner’s attitude, ability to be objective and willingness to bring in help when needed.

If the above content raised any concerns you wish to discuss or need professional guidance on, please do not hesitate to contact any accounting office.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or ommissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial advisor for specific and detailed advice. 

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Red flags: Financial reasons why small businesses fail

A2Many people dream of starting their own business. Few of the dreamers get as far as actually starting a business. Even fewer of the businesses survive in the long-term. Too often small businesses fail due to reasons, financial and otherwise, that could have been managed or altogether avoided. Continue reading to see if you recognise any of these red flags in your business. 

Lack of financial skills, financial planning and financial management

Have you done any financial forecasts for your business? Never?

Do you control spending with a budget?

Do you know how much income (revenue) and profit (no, they are not the same thing) you are making on each transaction? Are you focused on the products that generate the most profit?

Are you aware of the cycles (e.g. seasonal cycles) in the business sector you operate in and do you plan your cash flow according to the effect these cycles will have on your income and expenses?

If you answered “No” to any of the above questions, that could be a red flag popping up. 

Not enough cash reserves/savings

The minute any business starts to struggle with cash flow, a red flag immediately goes up because no cash means no business.

Something bad or unforeseen is bound to happen to your business from time to time – that’s life. The question is, when it happens, is there enough cash available to recover from the setback or challenge? No? There’s that red flag popping up again.

Some other sources of potential cash flow problems worth looking into are:

  • Falling behind on payments of day-to-day expenses e.g. suppliers, rent.
  • Borrowing money without a realistic plan or the means of repaying it.
  • Paying suppliers COD but selling to clients on credit. Does your business have enough cash reserves to pay suppliers immediately and wait for payment from your clients for possibly more than a month? Ideally the business should be able to pay suppliers on time and coordinate these payments with cash inflows from clients.
  • Uncontrolled personal use of business money – in other words: raiding the business’s cash register whenever you need money for private purposes.

Poor accounting

You can’t control and manage your business if you don’t know what’s going on with the finances. Business decisions need to be based on accurate, up-to-date financial information otherwise you are flying your business blindfolded. Remember: you can’t manage what you can’t measure. 

Lack of awareness of the relationship between different functions of a business

Consider the following statement: Without money there is no business and without business there is no money. Or to put it differently: If you neglect sales, there will be no money flowing into the business and if you neglect managing the money, you will not be able to pay for the products or services you need to generate sales.

There is a fairy tale idea that an established business will just run itself. If there were any truth to this idea, there would have been a lot less small businesses going out of business or failing for various reasons. If you want to ensure that your small business will thrive now and in the future, there are certain things you have to do. It is never too late to start doing cash flow planning or draw up a budget. Remember that even a mature plant needs to be watered so keep those forecasts rolling!

If the above article raised any questions in your mind or you need professional guidance on this topic, please do not hesitate to contact a business consultant who can assist you in the planning of your business. 

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or ommissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. 

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