How to prevent business failure – Part 3

One key skill that you need to acquire if your business is to succeed is financial management.  Poor financial management can put your business straight to the path of failure.
You should be able to know where the money is coming from and how you are using that money.  It’s very critical that you account for every cent that is coming from your business. Your business might be making money but if you fail to manage your cash flow, taxes, or account for other expenses your business will not succeed. To avoid financial mismanagement it’s advisable to use professional accountants to keep the records of the business or to use a professional business accounting software to help you keep records of all financial transactions up to date.  The software will help you to record every expenditure and all revenues received and you can then easily use this information to generate the financial statements and assess whether your business is making profits or losses.

The accounting software will also assist you in generating very valuable information needed to run your business. Producing the numbers is not enough you need to be able to interpret the meaning of the numbers.  Bill Gates advises every business owner, “Know your numbers. It’s a fundamental precept of business.” You therefore need an appreciation of what the numbers mean.  Understanding the meaning of the numbers will also enable you to make reasonable decisions because you will be able to diagnose the causes of any adverse performance.  As a business owner you should at least be able to read the financial statements. If you don’t have such skills it’s worthwhile to acquire such.

Most businesses struggle because of failure to manage cash flows. A business might be making profits but if it does not generate enough cash then it’s doomed to fail. Cash is critical to a business like what blood is to a human being.  Cash flow is the life blood of every business. Keep an eye on the cash flow and you will see your business flourish. Effective cash flow management is the only sure way to succeed in your business.  A business should balance between getting cash from its sales and cover its expenses. A business should do what it can to bring in revenues while limiting expenses. It’s very important that a business maintains a healthy cash flow situation and avoid extended periods of negative cash flow.  In order to monitor the cash flows a business should regularly prepare projected cash flow statements so that it will know when the business has a negative cash flow and how to finance that deficit and when there is excess cash how that cash should be invested.

Managing your cash flows might require you to talk to your debtors to pay on due date or earlier and also negotiate with your creditors on them relaxing on payment terms.
When preparing projected cash flows it’s important to balance out between optimism and realism. You need to adopt a positive outlook of the business but if one is not careful this optimism can also lead one to overestimate potential revenues or cash flows while underestimating future costs.

Unrealistic projections can lead business owners to make poor decisions because they will be based on inaccurate data. Maintain some realism when preparing forecasts.  For your business to succeed avoid financing the business using high debt. Some business rely quite heavily on debt but debt, in all its forms, can be a double-edged sword.  Usually problems come in when the business is not doing well but still has to service the debt.  Failure to meet debt repayments on due dates can lead the business into bankruptcy. It is therefore advisable to keep the debt within manageable levels. One can monitor the levels of debt by tracking the debt to equity ratio or the interest cover ratio. A business that spends most of its cash on repaying debt, rather than expanding the market, will lose its ability to be flexible when competition is attacking its market.

One of the causes of business failure is not doing enough marketing so that your product is known by customers.  Most businesses, when facing a recession, would rather cut the marketing budget to survive so as to cut cost. But they fail to know that the aim of marketing is to know and understand the needs of the customer so that the service or product you provide fits well with the customer’s requirements.

Failure to do so might result in your customers deserting you because they don’t know if you still exist or because you are out of touch with your customers you might end up supplying what the customers don’t like.  It is said that advertising is the mouth piece of a business so don’t cut your marketing budget but keep it to boost your sales.

Stewart Jakarasi is a business & financial strategist and a lecturer in business strategy and performance management.
He provides advisory and guidance on leadership, strategy and execution, preparation of business plans and on how to build and sustain high-performing organisations.
l For assistance in implementing some of the concepts discussed in these articles please contact him on the following contacts: sjakarasi@gmail.com or +266 58881062 or on WhatsApp +266 62110062