For all the rewards of being your own boss many things taken for granted as an employee will disappear: job security, set hours of work, known and guaranteed income, holiday and sick pay, and long service leave.
Our advice to anyone seeking to establish a small business covers five “must have” personal qualities and resources.
- A commitment to hard work and personal sacrifice;
- Enthusiasm, tenacity, and the appropriate level of self confidence;
- A product, skill, or service which is marketable;
- Managerial, administration and marketing skills; and
- Adequate personal financial resources.
According to the Australian Bureau of Statistics, more than 60% of small businesses cease operating within the first 3 years of starting. This is a fairly daunting figure to look at when you are really enthuastic business person looking at starting a new venture. While the reasons for business failure are many, the most common appear to be:
- Under capitalised;
- Poor management;
- Inadequate records;
- Stock – too much, or too little;
- Failure to plan;
- Misuse of time;
- Neglecting marketing; and
- General management incompetence.
Yet excuses for business failure are too often levelled at “business climate”, finance costs and difficulties, demand slumps, and regulations – not at the five “must haves”.
Insufficient capital makes it difficult to purchase stock and materials which in turn means lost sales. Invariably the business will fail to meet its commitments as they fall due.
Lack of management expertise
A detailed business forecast/plan is essential, not only for the purpose of raising capital but to act as a blueprint for your business’s future growth. Make sure you have the necessary expertise in your chosen business field; don’t think you can get away with learning on the job.
Any business that fails to forecast its cash flow appropriately is headed for trouble. Without proper and accurate cash flow projections, management is unable to identify future cash requirements and hence lacks vital information about the financial direction of the business.
That’s why we strongly recommend the preparation of a 12-month cash flow budget before you start the business. Ideally each business should have a budget showing expected future income and expense levels and the minimum return to the owner.
There are many “tricks of the trade” that can be used to preserve your cash flow – leasing particular assets as opposed to buying them is a good example.
It is vital for each business manager to know the point at which the business will break-even. This is the point at which the gross profit (revenue less direct costs) equals total fixed costs. Knowing these revenue levels and monitoring them regularly will equip the owner to know from month to month how his or her business is performing.
There are many signs on the road to failure and if these are addressed then survival is more likely to be assured.
Profit vs cash flow
It is often not fully appreciated by business people that making a profit do not necessarily mean cash flow will be positive.
A wise man once said, “Profit is an opinion, but cash flow is a fact.”
The long term trend of both must be positive. Hence it is vital to appreciate the importance of the interaction between profitability and cash flow projections. Low profit months will generally impact on cash flow in the current and following periods. Therefore the ups and downs in turnover will usually be mirrored in cash flow projections.
The following is a list of items that often contribute to there being differences between profit and cash flow.
- Work in progress;
- Fixed assets;
- Shortened supplier terms of credit;
- Change in sales mix, with an increasing proportion of credit sales as opposed to cash sales;
- Loan repayments;
- Dividends; and
The cash flow budget and the other scenarios we will prepare on your behalf will take these factors into account. However, please do not hesitate to ask us if you require further clarification in this important area.
Borrowing excessively means a greater portion of gross profit is directed towards finance costs. Cash flow is also drained by repayments.
Incorrect pricing policies
Too often prices are set to market determinants rather than to cost recovery and profitability generation. Efficient service or added value may be more important than price alone. Unless you can make an adequate margin of profit, you are doomed to failure.
Many small businesses go broke simply because they don’t sell enough product or they fail to keep abreast of market, operating and technological changes. In business, nothing is constant. There are many definitions of marketing, however put broadly, marketing is a strategic mix of business activities that work towards a bigger goal of building your brand and business. Marketing is about identifying and understanding your customers and developing products and services that meet their needs.You must continually update your product or service to stay in tune with market demands.
Partners should be selected in the same way as employees are selected – that is, on the basis of their ability to contribute effectively to the business and help achieve its goals. Too often a partner is selected simply because he/she is a relative or friend or is willing to contribute an amount of capital.
Irregardless of the “business climate”, most managed businesses will be able to:
- Weather economic and business storms;
- Have proper financial information;
- Have an adequate product mix;
- Do not rely too heavily on one, or a limited group of customers or clients; and
- Know their operating environment.
Ensuring you have the above in-check will most certainly enhance your chances of business survival, no matter what the climate.