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Why Does a Business Fail?

When does a business fail? When customers aren’t happy? A product or service isn’t delivered on time? Poor workmanship? Or does it fail when there’s a lack of systems or businesses just stopped paying their bills?

In my opinion, a business fails when it runs out of cash. Lindsay Fox, the billionaire transport guru, says: “As blood flow is vital for life, so is cash flow in your business. Without it, you’re dead.”

A lot of my clients approach me and ask for assistance in getting a loan to help with their cash flow problem, but seeking a loan is a quick fix. More often than not, when a business gets a loan to deal with a cash flow problem, the problem doesn’t get fixed. Once the loaned money is exhausted they are in an even worse position than before. The right approach is to find the cause of your cash flow problem.

Finding the cause of cash flow problems

When advising a client the first thing we look at is the cash flow problem potentially being caused by a lack of profitability in the business. If the profitability in the business is so low that it’s producing poor cash flow this is what needs to be worked on. This poor profitability, may be caused by a number of things. Your price might not be right, the cost of sales could be wrong or you could be paying too much for goods or labor. It could also be that jobs aren’t being managed efficiently or you’re paying too much overhead for the volume you’ve got. Whatever it is, it needs to be looked at.

On the other hand, profitability could be the problem. It may be that your business is growing. A lot of businesses that fall over and go into liquidations because of what’s called overtrading; they basically ‘grow themselves to death’.

Or perhaps your cash flow is strong but your processes aren’t strong enough to cope with the growth of the business. More sales cause more problems if you haven’t got strong processes in the first place.

Another problem area for small businesses, when it comes to cash flow, is inefficiency. They may be inefficient in the way money is collected or invoices are issued.  Maybe the way stock is managed or debt collection is handled inefficiently. If this is the cause of your cash flow issues it has nothing to do with money, you need to improve your rules and processes.

Avoid business failure and diagnose the cause of your cash flow problems.

Ensure you have some cash flow rules in your business. Maybe you could setup a credit application and create rules and limits for giving credit and have terms and conditions when offering it. Consider reviewing your invoices and check they have due dates and you are issuing them properly. Take a look at your processes and follow these three steps, manage your jobs, manage your invoicing and manage your stock and debt collection processes.

Strengthen the business by improving cash flow allowing it to grow and develop and improve your cash flow. Then your business can cope with anything.

Sam Polimeni