I went into a shop the other day, where I know the owner, and asked how she was doing. It opened a couple of years ago and 12 months previously she’d told me it was flying. The answer this time was not so positive. “I think I’ve plenty of customers but I’m not sure I’m making any money” came the response. “I’ll not know until the end of the year when my accountant tells me, I’m a bit worried. I don’t seem to have much cash in the bank.”
Do you ever come across a business you just know isn’t going to make it? It happens all the time. In fact the odds of a new business still being around after 5 years are less than 50%. We know this is true because most are limited companies and when they cease trading it’s recorded at Companies House and with HMRC.
Yet so much failure is avoidable. Because the reasons and remedies are often within our control. The information we need to succeed is there but we haven’t organised it or acted on it.
The majority of companies don’t make it because of issues with finance which, had they taken the right advice, could have been solved.
If you don’t have a profitable business model, sooner or later, you’ll run out of money. The lady running the shop didn’t know if her business was capable of generating net cash.
Building a fast growing business is an exciting challenge. In many cases the founders, unsurprisingly, focus their energies on their vision. Unfortunately, the numbers are often left to take care of themselves.
Whatever business we’re in we need profitable sales. By that we mean the difference between the cost of goods, our costs and the final selling price. It’s no good just concentrating on volume if it doesn’t result in net cash to the bottom line.
Early stage companies often manage their own books with an accountant who prepares the year end numbers for company’s house. A book keeper is often an early appointment, taking over duties such as monthly accounts, VAT, payroll and invoicing.
As a business grows it employs some regular qualified accountancy help. Often a freelance individual who is acting CFO to several companies steps in, bringing experience and expertise. Eventually this role becomes permanent, as does the need for a well-resourced accountancy firm who will advise on best practice.
But beware. There is a significant variance in quality and the type of help you get will make an enormous difference to whether you succeed or fail. Do your due diligence thoroughly. Understand your business model and keep your new advisors on a very short leash until you’re confident they’re right for you.
The rule here for business owners, large and small, is understand your numbers. Have the best you can afford to provide regular financial information and never fail to act on what you know. If your company would benefit from a weekly cash flow report get it done and use it. Buy financial support you can grow into.
There’s plenty on offer, but it’s not all the same, so take time to select the best you can afford. Even if that means diverting expenditure from elsewhere. Of course a new website is far more exciting than hiring a new accountant. But you really won’t enjoy the excitement of running out of cash and going bust.
By David Mansfield, founder of The Drive Partnership and visiting professor at Cass Business School