Although the rate of business failures has dropped below the record high of 2009, failure rates are still well above the rates seen before the start of the economic crisis. It's easy for owners to blame the recession for their firm's demise, but is the state of the economy really the greatest risk to small businesses, or are managers who underestimate the importance of marketing and cashflow taking the biggest risk of all? Jo Russell finds out
Of those businesses that have failed since the start of the economic crisis, a significant number will have failed to understand the risks facing them and will not have taken the necessary steps to prevent the risk becoming reality. Forewarned is forearmed.
When asked directly, by researchers from the Nottingham University Centre for Risk and Insurance Studies, more than half of small businesses thought that reduced demand was their biggest business risk. But separate analysis from Money Advice Direct shows that the most common reasons for failure are either marketing related – poor customer targeting, failing to meet needs of customers and lack of market research – or linked to cashflow 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, got 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 that 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 cashflow, but it will also help highlight any problem areas of 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."
Keeping an eye on the future
Having a keen eye on the cash will also help with one of the other great risks companies expose themselves to – inability to pay Crown debts. Richard Sorsky, who advises between 20-30 businesses a week, believes that this is one of the biggest problems businesses face.
"People are not putting their tax money to one side. 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 best be left to others is a classic business error, and prevents the directors from focusing on growing the business. Ian 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 concludes.
So, it seems 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 will go a long way to ensuring your firm has a strong platform for survival in even the toughest trading conditions.