Amid the devastation caused by the COVID-19 pandemic on businesses, and in particular small businesses, bankruptcies have soared. If you were to do an analysis of why many small businesses go under, you are likely to find that a significant number end in financial ruin by making the same or similar mistakes.
If your business makes these same mistakes, you too could walk the same path to financial ruin. By heeding the following practical advice, you can potentially avoid that happening.
Why do businesses fail?
South Africa’s small business failure rate of almost 80% within the first three years means that a lot goes wrong at the initial stages of starting a business. There are early indicators that entrepreneurs can guard against.
- Lack of customers: This can be caused by inappropriate marketing strategies, being in a wrong location for your target market, poor signage, new competition and even poor visibility.
- Low productivity: This is often caused by low staff motivation, which itself can be caused by lack of staff training, using old and outdated equipment, wastage and high absenteeism.
- Cash flow problems: This can be caused by various issues in the business such as falling sales, high expenses, debtors being slow to pay, excess stock and poor use of financial record.
- Falling sales: The likely cause of this could be targeting the wrong customer, having old and outdated products that no longer serve the needs of the customer, or competition.
- Low profits: This is a factor of many of the problems identified above. Causes of low profits are poor sales performance, wrong pricing strategies, inability to control expenses and sometimes poor decision making.
If you can address these symptoms early and take control of your business, you increase your chances of avoiding bankruptcy.
Following a business plan
Successful businesses invariably have a business plan in place, and that plan is a living document. They follow it.
Being a small business owner, you can easily be caught up in the excitement of the daily grind and easily get distracted from the bigger picture.
While it is important to be hands on and work in the business, take some time out to work on the business. Stay focused on the essential strategic course.
Without a business plan, you have no yardstick by which to measure your performance. Without a proper yardstick against which you measure your performance, financial ruin could sneak up on you.
Understanding and managing cash flow
This is the life blood of your business. Without a constant flow of cash, your business will suffocate and die. If you run out of cash, you are in big trouble.
Understand the cycles that occur in your business cash flow. You need strong discipline to control your cash flow. You must rightly differentiate between cash flow and profits and take appropriate control over stock as well as debtors.
Focusing on running the business
Stay in control of your business! Do everything you can to avoid the trap of believing that because you are good at providing services, or that you offer outstanding products, or negotiate great deals, you will be as good in running your business.
Different sets of skills are required to do handle these activities as opposed to running a business.
If your focus is only on what you are good at doing and you leave little to no time for managing your business properly, it could be only a matter of time before you find your business going down. Run your business and do not let your business run you.
Keeping records up to date
Admittedly, for many, this is not an exciting area of running a business. In the hustle and bustle of running a business, it is often the paper work that is either forgotten or left to last.
Good quality records are absolutely essential. You require up to date records for just about everything that gives life to your business. This ranges from keeping tour tax affairs in good standing, negotiating with a prospective investor, negotiating with a bank for an overdraft facility etc.
Besides all these reasons, keeping proper tabs on how well your business is running makes good business sense.
Focusing on profit, not just survival
If your focus is on mere survival, you stand a good chance of being left with very little in your financial reserves. This will mean that you are not able to fund growth. You must focus on and plan for profits.
Be clear about how much profit you will need to make in order to enable your business to grow and develop. Knowing how much profit you need to progress will give you the impetus to organise your business around this target.
Managing resources with wisdom
Like all businesses, your business has a wide range of resources to manage. Some of the examples of resources you must ensure you manage wisely include time, cash, raw material, and people.
There is a direct correlation between good resource management and profitability. In order to be successful, a business must manage its resources well, because in the long run, profits flow from meticulous resource management.