A recent study found that half of all UK start-ups fail within the first five years; however, it’s not only start-ups that are at risk, several large retailer companies have failed in 2018 already.
The question is, ‘what makes a business fail and how do you prevent it?’
Ruta Gabalis, CEO of AeroBlue and investor, shares her expertise.
Insolvent – a word many business owners are afraid of, but what does it mean? A company becomes insolvent when it is unable to meet its financial obligations, ultimately then they fall due.
Companies become insolvent primarily due to cash flow and poor financial management, the main problems being:
1. Insufficient knowledge of business finance
When someone decides to start a business, it is often in the industry that they specialise in. Whether it is IT, fashion, or construction, it is likely they know more about their trade/industry than they do about running a business. With some research and practice it is possible to improve essential business skills; however, business finance skills in owner-run companies seem to remain at a minimal level. Accountants are often the ‘go to’ specialists for any financial requirement, and this can be an excellent preventative and management tool for a business of any size. It is, however, important to remember that no one will be as invested in your business as the person who created it, (you). It is crucial that you are not only able to spot issues with cash flow but also hold sufficient knowledge to have a meaningful conversation with your accountant in how to fix it.
A lot of the time, business owners become so engrossed in running the business and forget to take a step back and look at their company from a shareholder’s point of view. Business owners who are able to view their business as a “product” and manage their company at the same time have a better chance of succeeding because they don’t lose focus on what makes a business successful from the perspective of the potential investors.
3. Credit control
Good credit control is essential to avoid cash flow problems. Many business owners are afraid to talk ‘money’, meaning they avoid asking to be paid when the invoice falls due. Avoiding this can lead to debts and believe it or not, people understand that ‘money makes the world go round’, and you need to be paid to keep your company’s cash flow healthy to continue providing your customers with the products or services.
More often than not, when a business owner begins to see cash flow troubles, all communication goes out the window. Whether it is at home or work, people tend to avoid talking about it, maybe because it feels uncomfortable and embarrassing. Shying away is a big mistake, not only can it have an effect on the improvement of things in the workplace, but it can also bring your work troubles into your home/family life. Communication is vital, especially when talking to your suppliers. If you avoid talking to your suppliers you could risk making the situation worse, because if they put your account on hold or worse, apply to the court to recover the money it could damage your companies credit score, reducing your chances in the future of securing finance. Remember, your supplier wants you as a customer, and it is in his interests to help you to find a solution.
5. Seeking help
As much as it may feel like your pride is taking a huge knock by admitting you are in trouble, seeking help early gives you a better chance of saving your business. If a red light appears on the dashboard of your car and you cannot fix it yourself, you would take your car to the garage and leave it to the specialists to find a solution. So if you start to see your cash flow KPI’s going into the red, you should find a specialist that can help you. The quicker the problem is fixed, the less it will cost your business in the long run.