7 deadly sins of small business
Small business is a tough gig whichever way you cut it. Competition is fierce, margins are slim, loyal clientele hard to find and harder to keep, red tape is burdensome, and good staff hard to find. That’s why it’s important to get some of the basics right to stay in the game. Summarised below are seven key areas.
I have identified over the 25 years I’ve worked with distressed businesses:
1. Undercapitalisation – Unfortunately for many SMEs, capital reserves typically don’t go beyond the $1 or $2 capital contribution on initial startup. It tends to stay this way throughout the life of the business. As the cash cycle is always playing catch up, a significant event such as a major bad debt or unforeseen sunk cost can render the business insolvent overnight as there are no capital reserves to call upon – resulting in imminent failure.
2. Mismanagement – The focal point of management is the efficient and effective use of the business’s scarce or limited resources. In an ideal world, each and every resource invested into your business should return a net gain, and that includes every single thing that is used in your business to deliver your product or service to your customer, both tangible and intangible. One poor management decision could lead to lights out.
3. No planning – How often do you hear you need to plan? Most don’t do it. There needs to be purpose to your business; a plan gives you purpose. It can be as simple as a quarterly cash flow budget or a more sophisticated business operational plan that includes specific, integrated plans for each core business area depending on size of business.
Those not planning do so at their peril.
4. Blinded by success – Success needs to be managed carefully as with all aspect of business. The gSood times tend to be there to get us through the bad times and not to be wasted. I have no doubt that some in the mining and related services sector are wishing today they managed the boom times a little better. Success can lead to over expansion, over spending, investments in non-core activities, over commitment to mention a few outcomes, this can lead to financial distress.
5. Moving away from strengths – Identify what your business strength is and use it to compete. Stay focused on your strength and don’t move too far away from core competitive activities; “stick to your knitting” so to speak. Do not venture into areas you don’t have the skills or experience to be competitive.
6. Not heeding advice – Advisers are there for good reason; get a good one and they can be the beginning of a long, happy and rewarding relationship. Not all accountants are business advisers. Word of mouth is a good way to fish out the good advisers. And when you find a good adviser – LISTEN!
7. Numbers – It’s imperative to maintain timely and complete accounts. That said, when reading reports, it’s even more important to understand what the numbers mean and how they relate to one another. The accounting data is fundamental to good management decision making. Not understanding the numbers can lead to disastrous decisions being made.