7 ways to go broke

Featured in the AWCI ‘On The Surface’ Magazine 29th Edition Autumn 2016 on page 30

The history of business is rife with examples of companies that failed because they didn’t remain competitive, or failed to consider ways to decrease their weaknesses, overcome the threats or build on strengths. Consider these 7 factors to be in control of in your business, if you don’t want to become a statistic.

1. Insufficient capital

Most SMEs (small to medium enterprises/businesses) are under-capitalised and don’t have sufficient financial buffer for quieter times or unexpected expenses. This problem is compounded when there are no arrangements in place with their banks that could bail them out of trouble. It’s critical to know how much capital you’ll need. And if you do have a significant financial buffer, don’t get lazy on keeping a check on your KPI’s to make sure you keep it that way.

2. Lack of profit focus

Too many businesses don’t plan for profits or adequate profits. They tend to focus simply on survival. This leaves them with nothing in reserves or to fund growth. Good businesses know how much profit they need to be making and then organise their business around this.

3. No business plan

Statistics show that top quartile businesses are twice as likely to have a business plan in place. As the majority of SMEs don’t have a business plan, they tend to lose focus and are too easily distracted from the right strategic course for the business. It also means they don’t have a yardstick to measure their business performance by.

4. Don’t know break-even point

One of the most critical pieces of information for any business. It is only when you know this that you can make effective pricing and costing decisions. Too often businesses get into trouble because they trade under their break-even point.

5. Working in the business, not on the business

Don’t fall into the dangerous trap of believing that just because you are good at what the business produces or offers you will be good at running that type of business. If your time is so caught up in what you’re doing that you never have time to manage the business properly, the business usually runs the owner rather than the owner being in control.

6. Inadequate systems

Too many SMEs are run out of the owner’s head. As they don’t have operating systems in place they are too dependent on the owners and don’t gain sufficient leverage. A lack of systems - sales systems, marketing systems, strategic systems, customer service systems - can cause differential standards and an inability to provide consistency within the business.

7. Cash flow management

Businesses often get into trouble because they run out of cash. They don’t differentiate between profits and cash flow and they don’t understand the cycles that occur in their business cash flows. Cash flow management requires strong discipline and control over utilisation, workflow, stock and debtors.