Business Start-Ups and Failure

There are more and more Canadians starting their own business and it is thought that as many as 3.2 million are thinking of starting a business.  An Ipsos-Reid survey showed that 2.8 million existing small and medium-sized business owners feel that money is definitely a motive for many aspiring entrepreneurs.  Another major draw is having more control in their lives.  Many entrepreneurs find out the hard way that running their own business is not as easy as it may seem, and that a seemingly successful idea can end up in financial ruin.  So let’s review some common areas that are often overlooked by management.

A poorly managed or missing information system can spell ruin.  Your system should generate daily and monthly reports on your business transactions.  This will assist you in making decisions regarding which areas it would be most beneficial to spend your money on.  Monitor your inventory levels by conducting periodic inventory counts and comparing the actual numbers to what you think you have on hand.  This should be completed by staff members who are not responsible for the inventory.  Regular counts will ensure that you have the product you need to keep shipments going out as promised.  Customers that get what they want when it is promised to them are happy and will return. They may also refer business to you.  By doing regular inventory counts you will also be able to pinpoint obsolete or slow moving products.  If you have an over abundance of these products they can tie up precious cash.  Keep records of customer complaints, disputed invoices and credit notes with detailed explanations for each.

Another critical area where cash flow problems arise is accounts receivable.  Slow collections can lead to invoices that are never paid which will directly affect your bottom line.  It does not matter how much you sell, if you do not collect on your sales, your business will fail.  It may sound extreme, but every dollar you do not collect reduces the amount of cash available to purchase new inventory or grow your business and also leaves you with write offs that affect your company’s bottom line.  If you pay commissions on gross sales, imagine how much you are paying out on uncollected accounts.  Accounts receivable should be reviewed on a weekly basis.  Sales commissions should be based on collected sales and overdue accounts should be dealt with immediately. 

Just like with individual finances, if your company is spending more money than it is making, it is only a matter of time before financial failure is a certainty.  In order to be cost efficient, ensure that there is a formal expense approval system in place for all staff and supervisors, and that it is adhered to.  Only business related expenses should be allowed and expenses such as cell phones, advertising and entertainment should be strictly budgeted.  Comparisons should be made on a monthly basis between actual and budgeted amounts.  Expenses for assets should be reviewed to ensure they are necessary and that funds are in place to support the outlays.  Has the expense been addressed in your budget and do you have the cash flow to support it?

Is your business reliant on a handful of clients or is your customer base diversified.  Having your revenue coming from a small base could set your company up to fail.  If you only have 5 clients and one leaves, 20 percent of your business is gone.  Would your company survive such a scenario?  Actively work to diversify your client base and develop a good business relationship with your key customers to ensure that they are satisfied and have no reason to take their business elsewhere.

Entrepreneurs are generally optimistic, they have the vision and drive to develop and grow their businesses.  However, they often lack the financial ability necessary to manage cash flow and, as a result, profitability suffers.  Do not try to be all things in your business.  Develop professional relationships that give you the tools necessary to succeed.  This will allow you to concentrate on what you do best.  Work with your accountant to determine what resources you have available for financial office staff and what you need.  Your advisors should work closely with you to develop a plan that fits your needs financially as well as operationally. 

Keep an eye on your debt levels, whenever I research a public company to invest in on any stock market I always look at debt.  How much debt do they have and how are they servicing their debt.  These are the very questions you need to address in your business.  Debt may have been necessary at the start of the business however; you must manage your business to ensure you develop a plan to repay debt out of the cash flow of the business.  Look for ways to find extra cash; can you refinance at a lower interest rate and reduce your interest costs and repayment time?  Review assets for old or obsolete items that you may be able to sell.  Look for ways to reduce your expenses and review staffing requirements to determine if you have the right number of employees to sustain the business.

Review accounts payable and receivable terms, if your customers terms are net 30 days your vendors should be the same length of time or longer.  At month end your receivables balance should be larger than your payables balance.  The greater the margin is between the two, the better off your company is financially.  Make sure your receivables are current and that you are collecting as quickly as possible. This will ensure that you have the funds necessary for day to day operations and that you are not relying on debt to continue running your business.    

If your company is in trouble seek outside advice.  An accountant or consultant will have a different perspective as well as a fresh outlook.  Have them work with you to find specific solutions that fit your needs.