New Year, New Business; Are you ready?
Many new businesses struggle to make it past the first few years. Following a few simple steps could save your business from becoming another statistic writes Roger Mendelson, CEO, Prushka Fast Debt Recovery.
Limited liability has been an important building block of the western world’s commercial system since its introduction in the UK in 1855.
Starting a new business is an exciting time for any new business owner. It is usually the culmination of years of hard work, stress, investment and for many – a significant life achievement.
But despite the highs, new small business owners quickly realise the complexities of owning a business with ABS figures revealing that approximately 60 per cent of new businesses won’t survive past the three-year mark.
The latest Australian Securities and Investment Commission (ASIC) insolvency figures revealed that 79 per cent of businesses suffering insolvency last financial year were small businesses with fewer than 20 employees, with 86 per cent of failed companies having assets of $100,000 or less.
WHAT’S GOING WRONG?
The ASIC figures reveal some crucial takeaways that can be applied to both new and experienced SMEs. The top three nominated causes of failed companies were inadequate cash flow or high cash use, poor strategic management of business contributing to downfall, along with poor financial control, and the lack of adequate records.
While the rate of failure is somewhat startling, it shouldn’t deter your enthusiasm. However, for your business to succeed, there are a few steps you can implement which may save your business from becoming a statistic.
PLAN YOUR CASH FLOW
The top reason for business insolvency is poor management of cash – so planning your cash flow is crucial. Monitoring cash inflow against outflows ensures you know where your shortfalls are, and can work to predict them, protecting yourself from slow periods. Then, when a slow period comes around, you will be prepared allowing for loans or keeping a surplus on hand. For example, for many SMEs, the post Xmas period is a period of poor cash flow.
SET AND ENFORCE PAYMENT TERMS
Implementing a solid billing and debt collection system will help new small businesses form a positive habit, keeping in control of incoming payments, ensuring you stay on top of your finances. Set your payment terms for no more than seven days and ensure that you get invoices out promptly and follow them up regularly. If you are granting credit to business client, I can’t stress enough that you must have trading terms in place and enforce a 60-day payment cycle.
Poor financial control and strategic management is a major downfall for all businesses. Connecting and forming good relationships with professionals that support the direction of your business is key, working closely with your accountant, lawyer and bookkeeper means you can anticipate any major issues, allowing you to be better organised should something go wrong.
LOOK FOR WARNING SIGNS
Don’t forget to look at the overall financial performance of your business. As a new business owner, it’s easy to get caught up in the day to day goings on. While that’s important, it’s also necessary to take a step back and look at the bigger picture. Take notice of suppliers pushing you for payment, cheques bouncing, struggling to get credit – take this as a cautionary sign that something isn’t right and start making changes. A good idea is to monitor the bank figures daily, even if you have a book-keeper.
LOOK OUT FOR GRAVEYARD MONTHS
February to March is what I call graveyard months. It is the time of year when SMEs really start to feel the effects of the Christmas slow down and it’s the most common time for businesses to enter a death spiral, which is very difficult to pull up from. B2B sales decline and combined with the Christmas shut down and increased holiday bill, it can leave businesses struggling to recover as debts finally catch up. Planning is key to surviving the graveyard months; have a clear idea of where money is spent and carefully consider where you can save money, whether it’s through discounting stock, following up invoices, or negotiating payment terms. All can help you avoid a dangerous time.
Graveyard months are around the corner – new businesses are at a higher risk of failing to recover from the slow down than wellestablished businesses with wellestablished processes. Identifying that this is a critical time for your businesses is the first step.