Funding a business can be difficult. When there are problems, it can be incredibly hard to convince bankers or other finance institutions that your business is worth backing.
The key here is to ensure the primary function of the business is working well i.e. that it is capable of continuously attracting, creating and retaining a customer. If you can do this, then a well-written business plan will give a funder sufficient confidence to invest in your business.
In part 2 we will explore the finance-related areas that cause businesses to fail. In part 1 of my article, I wrote about 7 areas that cause a business to fail. 1 and 2 were marketing-based, so let’s move on to the next 2 areas…
3) Excessive overhead costs.
With any business, it is important to ensure overhead costs are monitored. Increases in these costs, coupled with flat sales may result in a loss-making situation. Over a relatively short term this may be fine, especially if your business has invested in additional staff and training ahead of planned growth in sales. This is then called prudent investment.
A downturn in sales may cause an imbalance with overhead costs too high for the current level of sales. Attention to reversing this trend must be immediate. If not, then you, as the business owner must take very tough decisions to reduce the overheads. These decisions are unpopular but the long term viability of your business depends on it. This could result in potential reduction in working hours or job cuts. This must be handled carefully and within the law, so specialist advice is required.
One of the worst decisions I’ve often experienced is to cut marketing costs, usually to zero. Anybody who advises this clearly has no understanding of marketing and in my opinion, should not be advising a business. Ceasing all marketing activity has to lead to disaster.
What any good advisor does is analyse the returns on the current marketing spend. It may be that some trimming is required based on the figures. It could be that there needs to be a total re-think in the marketing activity and that all current marketing ceases and new activities commenced using some of the budget. This is where good decisions are made, based on facts and not assumptions.
4) Insufficient cash to fund orders.
Most often, this happens when a business is over-trading or recovering from a slump. Orders are now strong and yet there’s insufficient funds to purchase raw materials. Suppliers will not release further goods until previous invoices are paid.
Yet again, a good business plan and the right discussions with funders should release the funds the business needs.
One of the important aspects of attracting funders is to ensure you have a solid game plan to secure your future. It’s also important to acknowledge mistakes/lessons from the past to demonstrate you as a business owner have a firm understanding of all aspects of your business and will take responsibility for the actions of the business to correct these mistakes. It would help to fully explain what happened, what you learned and what you changed to ensure it doesn’t re-occur.
A good business plan should help funders see your vision, understand it and feel that you have covered the “what if” elements should they arise, with built-in margin for cover.
Poor debt control is another huge area of risk concern. Without dwelling on this subject, it’s important to create robust credit control systems and review the numbers frequently.
Poor credit control leads to prolonged payments for goods/services you have already provided. Your business is therefore funding your customer’s business. I hope you have built in the cost of this funding line into your pricing structure?
Of course, poor control can lead to bad debts. Can your business withstand such pain and are you able to fund it without detrimental impact on cash flow? The chances are you can only take so many hits before it hurts so bad and costs far too much in additional borrowed funds. So, act now and get a grip on credit. You may be unpopular with your sales team for a while but in the long term you stand a chance of surviving.
In part 3 of this series of articles, we’ll look at situations where business failure is caused by lack of planning in conjunction with inadvisable / poor management decisions.
See you in part 3…
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