Why businesses get into trouble – and what to do about it

Why businesses get into trouble – and what to do about it

They say that prevention is better than a company liquidation and with that in mind we’ve produced a list of some of the most common reasons that companies find themselves in difficulty together with some advice on how to avoid these bumps in the road.

No clear vision – so many businesses start off with a vague idea of what they want to do. The problem with this is that when other opportunities come along they get diverted into the long grass. It also means that managers and staff end up not working efficiently or towards the same goals.

Solution – sit down before you start (or now) and write down the aim of your business in one sentence. Any business should be able to express what it is designed to achieve in plain and simple terms that focus the mind.

No plan – you wouldn’t set out on a journey with no idea where you were going (no vision) and no idea how to get there (a plan). Most lenders will need a business plan with a cash flow forecast and profit and loss but even if you are not borrowing to start you company it’s good discipline to produce one anyway.

Solution – sit down and do a plan! There’s loads of good advice on how to do this on the web. It doesn’t need to be massive but you do need to understand where you are going and how to get there.

Lack of capital – it is often the case that businesses start off with too little money in the bank. It’s sometimes a case of just hoping for the best and sometimes due to unforeseen circumstances or lack of planning but not long after starting up, businesses find themselves short of cash.

Solution – Make a plan (see above) and make sure that you understand the difference between cash and profit. Ensure that you’ve been realistic about costs and when sales will appear and then build in some fat. There’s an old project saying that things will always take longer and cost more than you think and it’s true.

Lack of control – sometimes in the excitement and day to day hurly burly of business, things just get away from you. This lack of control can sometimes be expensive but if it’s not sorted out quickly it can also turn out to be fatal. In extreme cases it ends up in employee or customer fraud that spells the end of the business.

Solution – make sure you have sufficient controls in place so that you can either stop things getting out of hand or so that you can spot it when they do. If you’re not sure what controls you need then buying a little bit of time with an experienced accountant can help protect your business.

Over extending – if you read the press then you’ll often see fantastic stories of businesses that were started a year ago on a kitchen table and are now a multi billion pound organisation. Whilst these can be very inspiring you can bet that for every rapid rise up the FTSE 250 there are a hundred other start ups that over extended themselves too quickly and then went out of business.

Solution – keep your eye on your plan. Make sure that you retain focus and when an opportunity presents itself that seems too big or is slightly out of your expertise then ask yourself if it is wise to go for it and have the confidence to turn it down.

Taking on too much debt – this can happen to businesses large and small. Taking on a loan to buy a machine that will produce income is entirely understandable but new small businesses buying a brand new company car using a lease really need to ask whether the expense is essential or not.

Solution – be realistic. When you are looking at taking on debt you need to be clear about how you will service the repayments. Whilst your lender should do this they will be less bothered if they have a charge over your assets. You need to do some scenario planning and work out how you will make the repayments if your biggest customer goes bust.

Lack of management information – Using our journey analogy, how would you know how fast your car was going if you had no speedometer? One of the sure signs of a company that is in trouble is that the directors and owners don’t really know what is going on. Often this is a kind of macho bravado ‘flying by the seat of our pants’ and often it is simply not knowing what they don’t know.

Solution – get an experienced accountant or mentor to give you advice as to what sort of reporting you need to be doing. It doesn’t have to be huge and time consuming but it does need to give you a clear sign of the key metrics you need to monitor. You can find advisors who work on an hourly basis so that you only buy the time you need.

Lack of a sounding board – have you ever done something that in retrospect seems really stupid? I think we all have and the truth is that if we’d taken some honest advice at the time it may have been avoided.

Solution – find yourself a mentor that you can bounce ideas off and who will add in a bit of experience. You can sometimes find these provided by organisations for free or heavily discounted. Try The Princes Trust or local business organisations like the Local Enterprise Partnership. Alternatively there are plenty of mentors that will provide a sounding board type service.

Loss of a major customer – Again quite a common occurrence, a company gears up to service a major customer and then without warning the client either switches supplier or goes bust leaving the company to pick up the pieces.

Solution – three solutions to this one; firstly don’t put all of your eggs in one basket (google pareto theory) and make sure that you have a wide spread of customers across different sectors. Secondly make sure you do some simple due diligence on customers and keep an eye on their trading. If their invoices are large then consider insuring their accounts. Thirdly, make sure you do some environmental scanning. This means you keep an eye on the wider economy and reduce your exposure to a sector if things look bad (think of house building in 2008).

Loss of a key person – for smaller companies this can be a serious problem. A director or key employee leaves the business or even worse. The person concerned had knowledge and contacts, without which the firm cannot operate.

Solution – make sure you have key man insurance in place that will pay out on the death or incapacity of a key person. Also ensure that knowledge is shared, documented and centrally held, remember that clients are clients of the business and not of one individual.

Businesses can go bust for a variety of reasons and often it’s not one single cause but a combination of factors.

You can protect your business by following our tips above and making sure that you don’t fall prey to the most common causes of business failure.

If your company does experience problems then don’t bury your head in the sand. Get experienced advice quickly and act upon it and you may save your business.

Ends

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