A number of crucial errors can expose a business to severe difficulties and can lead to the business trading insolently and eventual liquidation. The following is not an exhaustive list however one that lists the major faults. The key task for any business is to identify, and then to develop a strategy to overcome and mitigate the exposure.
1. Excess Borrowing!
2. Wrong type of Borrowing, there are many options for a business to borrow or raise finance and can range from overdraft, business loan, factoring/invoice discounting, asset based lending, leasing/hire purchase, payroll financing, merchant cash advance, private finance/angel investment. The business needs to decide on the best source for price and stability for the business.
3. Borrowing over the correct period - particular risk for a business is to borrow over too short a period where the cash flow of the business will suffer.
4. Not Realising that cash flow is king! It is a sad fact that many profitable businesses fail due to cash flow issues.
5. Excessive Spending. There are many business owners who have a view that they need to have the image of a successful business to gain success - big offices, high end equipment, vehicles. There is also poor control over costs - staffing, poor efficiency and productivity and lots of wastage.
6. Inadequate contribution/ investment from owners (shareholders). The owners of a business contribute by not taking out too much profit (dividends) and also investing further capital if required. Too many businesses when they are successful take out as much money out of the business as they can which makes it difficult for the business to innovate and grow.
7. Failure to manage risk - growing too fast, bad capital investments, insuring inappropriately against perils.
13 June 2009
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