Why Businesses Fail
Why do businesses fail? They run out of cash! It's just that simple!
Of course there are other reasons like bad management, not researching the competition, not having a plan, not pricing properly, etc. but really, it all culminates into one major result.
- If you have bad management, chances are there will be an improper use or channelling of funds or losing good people which can turn into huge hiring costs on training new staff.
- Not researching the competition will probably result in your business losing customers to the competition - so no inflow of funds.
- Not having a plan - massive recipe for disaster because without a plan or a budget, you will have nothing to guide you.
- Not pricing properly, - goodness, that is another story for another day!
The summary of all this is when you have negative cash flow because you are spending more than you are earning, you will run out of cash and the business will fail!
If you're at the point where your business is on life support, well first - take a deep breath! We've all been there and you will get out of it! You just have to know what to do so you can retrace your steps!
So let's start from the very beginning to understand the real reasons for cash flow problems and what you can do about it.
No matter how good your business plan is or how talented your team is, things can always go wrong. No business is immune to failure, but by understanding the most common reasons why businesses fail, you can take steps to protect your small business.
One of the most common reasons businesses fail, like we said earlier, is due to cash flow problems. Not having enough money to cover your expenses is a sure-fire way to go under, and it can happen to even the most well-run companies.
Cash flow problems can stem from a number of different issues, such as not bringing in enough revenue to cover expenses, not being able to get paid on time by customers, or having to make large capital investments upfront or spending money on the wrong things!
In my free book, 7 Mistakes to Avoid as an Entrepreneur this was my Mistake No 4! Classic reason on why businesses fail. So let's focus on 'spending money on the wrong things for a bit! I wish I really understood years ago when I started my business - watch your costs like a hawk!
While it's obviously hard to build something new without the resources to do so, spending money to make money only works if you are spending on the right things. Whatever you do, do not fall victim of unnecessary spending!
Getting a space when you don't need to or can't even afford it , buying expensive machines without knowing where business will come from or premature hiring will all leave you crying premium tears. Save as much as you can in the early days till your businesses is strong enough to get to the next level.
So ask yourself these questions:
Getting an Office Space:
Do you really need that office? You do know it won't end with just the space right? You need to renovate, furnish and do some nice interior decor. And then add the extra electricity, utility and maintenance bills and it does rack up pretty quickly.
At this point, how exactly will this new office generate income? You might feel you need a professional space to meet with your clients but how about using a virtual office in the early days? Or go out to meet the customer? Or work from a hub?
If you are a fashion designer who needs a production space, there are sewing hubs you can use in the early days to save yourself the huge expense of renting a place. Or you can work from home and meet your client in their space. It probably is financially wise to start with that.
Of course, if you are financially capable of getting a space, please go for it.
Getting expensive tools:
Do you really need those machines? Or that printer? Far too many small business owners buy things they don’t necessarily need. They either buy tools they don’t need, or buy tools that are bloated with features they don’t use and may never use.
Better to purchase something that would suit a business of your size as long as it saves you a fair amount of money while being equally as effective.
Which brings me to another point. Try purchasing things that give the reasonable amount of benefit at that point in time with minimal cost - and which are directly related to revenue generation.
For example, you might want to use the free version of things and only upgrade when you have the stream of revenue to justify your upgrade or if you need some additional features that are important to your business.
Mistake No 3 that I highlighted in my free ebook, 7 Mistakes to Avoid as an Entrepreneur. Like I said - been there, done that! It might seem tempting but don't hire until you absolutely have to. And the person you hire must either be able to increase revenue or reduce costs.
Do you really need that PA to run those personal errands? I remember when I first started, I felt I needed that driver because I could not cope with the traffic. Well, turned out, I didn't really need him after all. I didn't move around often. After he left, I didn't get another driver. Turns out I just wasted all that money in the early days.
If you don’t need it, then don’t do it. Hiring people too quickly makes you burn cash faster than you need to. In fact, staff costs tend to be the highest expense of a company. Yes the temptation to get a sales and marketing team to boost revenue might be high, but if you can outsource it or get someone part-time, better for you.
Put into consideration which is more cost effective for you before you make a full-time hire. Don’t hire a full-time staff when you don’t have a full-time job for them.
Lastly, do not scale prematurely. Let's put it simply using the earlier example. Do not go paying for office space before you have employees to fill it. Start small and grow gradually. It can't be perfect from Day 1 so take your time and enjoy your growth process.
And these are just a few. So now, let's talk about some other solutions that can help you tackle your cash flow problems!
Know your real costs
Costs can be categorized as either fixed costs or variable costs. Fixed costs are those that do not change with the level of production, for example rent. Variable costs are those that vary directly with the level of production, for instance raw materials. Knowing true costs is critical to business success and will help you better understand your break-even point and where you need to cut back to make a profit.
Get personal. How much money do you need to live on? Are you taking more out of the business than it can afford? One easy way to check is to compare your business with others in your industry. You can use the ATO benchmarking tool, which compares businesses of similar size and industry. It can help you identify whether your costs are higher or lower than other businesses. If you're paying yourself too much, consider cutting back and investing those savings into marketing or a new product line. Also consider that your lifestyle may need to change as a start-up founder in order for your business to succeed.
Work with others
When you're running a business, it's important to keep tabs on your money. You should know where it's coming from and where it's going. The easiest way to do this, first things first, is by hiring a bookkeeper or accountant to help you out. This person can keep track of all your transactions and advise you when things look skewed.
You may think you can handle the accounting all on your own, but the truth is that others are often better at noticing patterns than we are; an outsider who isn't as close to the flow of money in and out will be helpful in spotting missteps before they become disasters.
Plus, doing this work yourself takes away from more productive tasks that only you can do (like running a meeting). By outsourcing some of these time-consuming jobs to a trusted partner, you'll be able to focus better and achieve more...Next up: be strong with decision making
Understand your cash flow
Cash flow is the money that flows in and out of your business. It's different from profit, which is the difference between what you spend and what you earn. Cash flow can be positive (there's more cash coming in than going out), or negative (more cash going out than coming in).
To stay on top of your cash flow, understand how much cash you need to run your business, how much cash is coming into your business and what will affect this amount. Having an understanding of these three things will help you forecast the state of your finances at any given time during the year.
This is important because it allows you to make adjustments before there are problems with paying bills. For example: if sales are down for a particular month, this may mean less money being collected from customers for products sold that month. If there isn't enough money coming into the business to cover expenses like rent or payroll, this could cause serious financial issues for your business. Understanding when sales are expected to go up and down can help avoid these issues by allowing you time to plan ahead accordingly.
Lean on your suppliers
Don't be afraid to ask for price breaks when you first start out. Most suppliers are willing to help new businesses get off the ground by offering discounts or payment options, and they understand that strong relationships lead to long-term growth for everyone involved. Never be shy when it comes to money matters. All you need to do is ask! The worst response you can get is a No. BUT you can also get a Yes so why not ask anyway?
Have a plan B (... and C)
No matter how much you've planned ahead, there's always a chance that something might go wrong with your project. A natural disaster could come through, and knock out power to your business. Or maybe you arrive at work one morning to find that someone has broken into your store, stolen all of your cash registers and set the place on fire. Yes, these are extreme examples, but they actually happened to real businesses in the past year.
The point is: it's smart to plan for the unexpected. Make sure that everyone involved in your business has a backup plan for when things don't go according to plan – and make sure that if you haven't already done so, you have a backup plan for your personal finances as well. After all: if you're going down with the ship, make sure it goes down as comfortably as possible!
Understanding your cost structure is vital to your success as a small business owner as it is essential in determining the price at which you sell your product or service. It can also help ensure that you earn a profit and don't inadvertently price yourself out of the market.
Understanding your cost structure is also important when making decisions about the future, such as whether to expand your business. For example, if you decide to open a second location, having information about how much rent costs will allow you to estimate potential rental costs for this second location. Knowing how many employees and what type of equipment is needed per location will help determine employee and equipment costs for the new location. By understanding all these factors, you will be able to make an informed decision regarding whether expansion is a good idea.
In addition, knowing your cost structure enables you to negotiate with suppliers more effectively. For example, if there are several suppliers that offer similar products or services at different prices and all other things are equal (e.g., quality), then cost becomes an important factor when choosing who to buy from. If one supplier's prices are consistently lower than another's but each has offered essentially the same quality products or services for years, it makes sense for you to choose the less expensive option over time because it keeps more money in your pocket so that it could be reinvested into growing or maintaining your business as opposed to being spent on expenses!
Above all, remember that mistakes are not failures! They are teachers, information, guide posts and opportunities. It is best to avoid cash flow problems but when mistakes do happen, don't beat yourself off over it. If your business does shut down, at least now you know what not to do in your next business venture. Dust yourself off, learn from your mistakes and trust me, you will do better next time.
If you have hit roadblocks, you should get this free ebook. It highlights 3 specific and common mistakes that lead to business cash flow problems and what you specifically need to do to fix it!
You can download your free copy here.