The top reasons why small businesses fail, and what you can do about it

This article titled “The top reasons why small businesses fail, and what you can do about it” was written by David Mellor, business mentor and author, for theguardian.com on Tuesday 28th October 2014 09.40 UTC

“Small businesses fail because they run out of cash.” A statement such as this is 100% accurate but completely unhelpful. It’s like saying: “The patient died because he or she stopped breathing.” When people set up their own business for the first time, three issues come up time and time again, often resulting in early-stage failure.

The first is not fully understanding what they are letting themselves in for. It’s important that you go into any new venture with your eyes wide open. In all honesty you cannot do enough research and homework before you start. The more unfamiliar the territory is to you, the higher the implementation risk.

The second is getting paid – bad debts often become a major issue. Lack of capital will destroy your business over time, lack of liquidity will destroy it in a heartbeat, and accounts receivable is your biggest contributor to liquidity. It is imperative therefore that you devise a strategy that will facilitate your being paid promptly, whether your clients are small businesses, multinationals, or public sector entities.

The third reason for failure is choosing the wrong business partner(s) to help grow the business. It is very difficult to steer two or more people onto the same page from the outset; it’s even harder to keep them there. People drift for a variety of reasons, or they may not subscribe to the same code of conduct as the founder. Do not take any chances – try to find a way that you can collaborate before formalising matters, so that you have an opportunity to see how you interact in practice. If this goes well, then you can proceed. If you have the slightest doubt, then take that as a sign not to proceed, at least not immediately.

Once you prove to yourself and the market that your model works, life becomes a great deal more complex as you look to take your business to the next level. As part of my research for the third book in my Crew to Captain series, I assembled the following pieces of advice:

1. Making decisions based on insufficient management information (MI) is not going to help. Make sure your MI is timely, meaningful and relevant. Furthermore, make sure you understand the financial drivers in your business, in particular your gross and net margins and your breakeven point.

2. Businesses without a plan B often fail. Make sure you have a risk register, with countermeasures to eliminate the main risk in your business.

3. Cash is, and will remain, king. Make sure your expansion can be supported by either long-term capital, working capital, or both. Without cash, your days are numbered. An expansive order book is no use if you cannot pay your bills.

4. Avoid concentration risk – it’s great if you have a significant predictable revenue stream each month from one client, but what if your key sponsor leaves?

5. Don’t lose sight of your core values – they should be enduring and if you lose them you are building your house on sand, in biblical terms.

David Mellor is a business mentor and author. His latest book, From Crew To Captain: A Privateer’s Tale, is out now.

This content has been sponsored by Xero, whose brand it displays. All content is editorially independent.

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