The top 5 small business killers

"According to Australian Bureau of Statistics, an estimated 42 per cent of small businesses 'exited' the marketplace between 2003 and 2007. When you look closely at the exits and how they got into that position in the first place, it becomes apparent that they found the challenges of growing a business, employing staff, paying taxes, getting entangled in government red tape and managing money all too hard¹".

One of the number one reasons businesses fail is poor financial management. Paying strict attention to your finances and keeping, clear and accurate records of the money coming into and leaving your business is critical to your survival.

Top 5 business killers include:

1. Too much debt

Above all businesses need to identify a suitable level of gearing. Too much debt and you can overextend your ability to service the debt which increases the risk of default and ultimately the ability to pay your debts as they fall due. The flip side of this is that too much equity dilutes your ownership interest in the business and can expose you to outside control.

As a rule of thumb for small business a debt to equity ratio of between 1:2 and 1:1 is considered acceptable.

2. Poor cash flow management

A cash crisis can be a death sentence for any business therefore, good cash flow management is vital.

No matter how good your products or services are, or how well you meet your customers needs, if you don’t have enough cash coming in each month to pay your suppliers, employees and expenses, your business will surely fail, so above all you want to avoid a cash crisis.

Here are some tips on how to avoid this pitfall:

• Perform regular cash flow projections, forecasting and budgeting are essential
• Monitor key accounting ratios and working capital requirements
• Pay your bills slowly but collect debts quickly
• Make it easy for customers to pay you, offer credit card or EFT facilities
• Establish clear credit and payment terms with your clients
• Closely manage your debtors, take notes about contact details, and be persistent with follow ups

3. Inefficient debt collection or poor credit management

Now that we understand that good cash flow is the lifeblood of a business we can see how poor credit management will have a direct impact on our cash flow. Customers who have received our goods or services but have not paid us as yet leads to a situation where our cash (working capital) is tied up and unavailable to the business.

A good accounting system can help you keep track of your Debtors and provide you with up to date information so you can effectively collect the cash that customers owe you. Detailed reporting can help you combat the issue of slow or non paying customers and better manage your aged debt, which will improve your cash flow overall.

4. Poor stock control

Poor management of stock means, too much money is tied up in products (stock) that is slow to sell such as raw materials or finished goods. Again this affects the cash flow of a business and may result in increased debt (gearing).

A sophisticated accounting system can help you to track all parts of this process, from the cost of purchasing raw materials to the shipment of the goods. However this won’t improve your bottom line if you don’t know how to use the information effectively.

5. Lack of management expertise

Even with the best accounting software and systems in place it is fundamental that business owners and senior managers are pro active in their approach to gaining a good understanding of financial matters.

A key element of running a successful business is to understand basic accounting principles, to stay informed, monitor and analyse financial results and consult a professional if you need specialist tax, accounting and audit advice.

A good software program can definitely help you get organised and stay informed so you can manage your cash flow and working capital more effectively.

However, in order to make insightful decisions that will grow your business in the long term, you need to be financially savvy so you can quickly analyse and understand your financial position, identify trends and address problems before they turn into a crisis.

¹ Jessica Stanic, Reasons why small businesses fail, Dynamic Business Magazine, Viewed 19 Dec 2009 http://www.dynamicbusiness.com/articles/articles-featured/reasons-why-small-businesses-fail4910.html.