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Why do Businesses Fail?

In the last 18 years I have only met a couple of businesses that failed because the business owners were lazy or inept.   The vast majority have been for one basic reason … they ran out of cash!    Cash is King!   It’s one of the most popular sayings from the 1970’s and the rise of the Business Schools.   But just because it is 30 years old doesn’t make it any less important to your business today.

But it’s a bit simplistic to say that the business failed because it ran out of cash, that is the symptom rather than the cause.   You need to look at things more deeply.   For example, there was the company that had a management buy-out using borrowed money.    They collapsed 12 months later.   Why?  They didn’t borrow enough money!   Simple in retrospect, but the problem was that the big four accountants that advised them forgot to ask how much money they needed to cover the wages and rent if the business didn’t do very well in the first year, so they only borrowed enough to purchase the company.    The advisors were blinded by the glow from their rose-tinted spectacles when they looked at the cashflow forecast.

I was called in about 3 months before the end to put in place a better monthly management reporting system.  By then the directors knew they might have a problem and needed to be able to control it and predict it – but it was too late, they were already up to the overdraft limit and the bank was unhappy about lending more.

So the question is why didn’t they have a management reporting system to begin with.   Actually they did, but it didn’t give them the right information!   The directors were not given any of the early warning signs.    Okay, they knew that orders were slow and that sales weren’t picking up, but they didn’t have the critical knowledge that time was running out and they needed to stop waiting for the next order and go get a loan.     The one piece of information that they needed was a cashflow forecast that looked forward 12 months – but importantly they needed two versions.   One that was pessimistic, and one that was optimistic.

The final irony for this company was that 1 month after the liquidators walked in, the sales director received a fax for a really big sales order.   They finally got the order they were waiting for but it was too late.

What does this mean for you?    ● make sure you get the right information from your management reporting ● think about the problems as well as the successes ● borrow more than you need not just enough ● plan a way around running out of funding.

Remember your accountant should be a helpful friend so speak to him, or ring us for a free consultancy on how you can keep cash king in your business.

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