Although the rate of business failure has fallen in recent years, the number of businesses that fail within five years of starting up is still too high. It's easy for owners to blame the economy and other outside factors for the failure of their business but are those factors really the greatest risk to small businesses? Should business managers be looking closer to home for the reason their business failed? Are managers who underestimate the importance of marketing and cash flow taking the biggest risk of them all? Jo Russell finds out...
A significant number of businesses fail to understand the risks facing them and do not take the necessary steps to prevent the risk becoming reality. Forewarned is forearmed.
When asked by researchers from the Nottingham University Centre for Risk and Insurance Studies, more than half of small businesses thought reduced demand was their biggest business risk. But separate analysis from Money Advice Direct shows the most common reasons for failure are either marketing related (poor customer targeting, failure to meet needs of customers and lack of market research), or linked to cash flow and cost control.
Reducing risk through marketing
Is there a discrepancy there? Probably not, says Richard Sorsky, director of Money Advice Direct. "Reduced demand is the phone not ringing, and under-demand for your products or services. And that comes down to bad market research," he says. "We call it the 'soap opera syndrome'. People have an idea and think they will set up a business. They know how to make things but nothing about sales or marketing."
Understanding your customers, and also their value, is crucial, agrees Richard Neal whose business, Lancing Press, ran into trouble when it acquired a distressed company with poor quality customers. The company acquired had a poor client base, in that clients generated low margins and were late payers.
"It dragged us down and we lost £45k as a result," Richard admits. "Now, we target clients rather than let them target us. We have account managers who do credit searches on companies we want to deal with. We target those which will be less hassle and more profitable."
Getting a grip on cashflow
The other step forward for Lancing Press has been taking a firm grip on its cash. The company now does cashflow forecasts up to six months in advance, and analyses cashflow and profitability on a weekly basis. Richard agrees with the Money Advice Direct findings, saying that focusing on these two areas has brought the company back to profitability.
"Ignore the numbers at your peril" is the advice from RSM Tenon's Ian Cadlock. "Many companies have crude reporting type functions, because they don't appreciate their importance. It means they have no idea what is going on in their business at any given moment," he says.
Having a firm grip on the finances will not only help cash flow, but it will also help highlight any problem areas within the business. "You need to be able to identify the core failings in your business, otherwise you are just wetting your finger and seeing which way the wind blows," he adds.
Keeping an eye on the future
Having a keen eye on cash can also help with one of the other significant risks expose themselves to - the inability to pay Crown debts. Richard Sorsky, who advises between 20 and 30 businesses a week, believes that this is one of the biggest problems businesses face.
"People are not putting their tax money to one side,” he says. “They invoice for £1,000 plus VAT, but at the end of the VAT quarter they don't have the money to pay the bill."
Scrimping on staff can also be a risky business. Taking on work yourself that should be left to others is a classic business error and prevents directors from focusing on growing the business.
Cadlock points to bookkeeping as a classic example; "If the directors think that this is something they can accomplish in a working day, they are kidding themselves. Every army needs its cooks and bottle washers," he stresses.
The real risks to small businesses are not all related to events beyond the control of owners and managers. Well-managed finances and sound marketing can go a long way to giving your firm a strong platform for survival, even the toughest of trading conditions.
Browse topics: Business planning