This is a guest post by Chris Baskerville from his response to a question on Quora – What are the most common mistakes made by small to medium business owners?
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A: Speaking from my experience as a Chartered Accountant with 11+ years experience in business reconstruction, insolvency, bankruptcy and liquidation, I can say that there are some common recurring mistakes made by Small to Medium Enterprises (SME).
The most common mistakes I see are…
1. Undercapitalization
This is like building a Boeing 747 airplane and leaving the tail off. You may not leave the ground on takeoff, or you may crash and burn shortly after achieving flight. I see too many businesses begin with very little capital and fall heavily reliant on debt with no alternate sources of equity. Without sufficient capital behind your business, you will fail.
2. Not reinvesting early year profits to achieve stabilization
Another observation I have seen over many years is that all too soon, after a business starts to gain momentum, business owners want to upgrade their personal lifestyles (bigger cars, bigger houses, bigger holidays etc.) and not take those profits and reinvest them in the business to secure its long-term performance. In effect, business owners strip away the businesses’ precious resources that could be used for vital operations, or expansion.
3. Expanding too soon
This concept took me a while to understand as to why expanding a business could be a bad idea. I mean, is this not what the nature of business ought to be? What I have found is that expanding your business before it has the key resources (cash, access to equity, access to credit) or key structure in place (i.e., key staff or management, well entrenched business systems, secured supply lines in place) can lead to disaster. Don’t underestimate organic growth. It may appear slow at first, but it is solid growth.
4. Chasing turnover at the expense of profits
I have seen this many times in industries that are highly competitive (i.e., construction). Businesses that chase turnover “just to keep the boys employed” can lead to business failure, unless you are properly capitalized to weather the shortfall in work until more profitable contacts emerge. Take for instance employee costs; what some SMEs fail to realize is that employing staff incurs many costs that are not obvious (accrued annual leave, accrued long services leave, leave loading (extra money when you take holidays), workplace injury insurance, payroll tax, to name a few. Such costs can be overlooked when pricing a job.
5. Failure to seek (and listen to) proper advice
Many SMEs subscribe to the lyrics in Frank Sinatra’s song (My Way) of “…I did it my way”. This concept has merit and is an obvious driver of commerce in an economy, but not seeking advice from someone with a different perspective, or someone that is very knowledgeable in business transactions (accountants, lawyers, financial planners, strategy experts) can be deadly. Good business owners that I see, always seek counsel from someone with a bigger perspective and surround themselves with the right people and advisers.
6. Failure to deal with people
If people don’t like you, they won’t do business with you. Regardless of your personality type, it is a must to learn basic people skills. Without it, you can be “Hung by the Tongue”. This goes the same for dealing with your staff (who are your biggest asset) as they perform the tasks that business owners don’t want to do, or shouldn’t do on the quest to grow your business.
7. Not setting up the structure of the business correctly from inception
This is an extension of not “beginning with the end in mind” Stephen Covey author of “The Seven Habits of Highly Effective People” and of failing to seek proper advice. A good accountant or lawyer will be able to advise you of the best way to structure your business to achieve your business goals. It may initially cost a few thousand to get this right, but it is one of the best insurance policies you will take. Understanding the pros and cons of being a sole trader, company, trading trust, limited liability partnership is vital to know at he beginning of a business’ life. Good accountants and lawyers know this and will guide you here.
8. Failing to adapt to change
I have seen many multi-generational companies (i.e., companies that were handed down from father to son, or grandfather to son to grandson), with the newer generation failing to adapt to the changes in their industry. Instead, they adopted the thinking of the previous generation which is: “that is how we always did things”. Now with the rise of the digital age, businesses that fail to embrace technology or to see how to exploit it in their business are falling behind.
9. Taking on too much
Some major corporate failures have occurred as a result of taking on too much work. This is liken to promising too much and delivering too little. It may seem weird that taking on more work than you can handle can be a bad thing, but this can get you into trouble. You may have a short term win when you eventually complete the work, but at the expense of long term repeat, referral work. Not to mention the impact on staff working under high stress demand to complete work. I have seen some restructuring occur where we had to strip the business back to its core offering in order to survive, which did mean reducing the amount of work taken on.
10. Reliance on one key customer
This can be deadly, especially if that one key client is the government. This is because a change of government or government policy can mean the end of your business. Outside of government, if your one key customer fails in their business dealings, it is almost inevitably mean that you too will fail. Not to mention that business analysts see reliance on one key customer as ‘high risk’.
11. Greed
You could just about paint a brush across many business failures as being attributable to greed. Greed could be encompassed in a number of forms; treating the business as a personal piggy bank; fraud by officers; avoiding a low-flying life; or simply, shooting for a project, job or file that is well outside the capability and available resources of the business. Over extension due to greed places undue stress on the business assets which may lead to ultimate failure.
12. Loggerheads at management
A lot of business failure can be put down to a breakdown of relationships between the key managers of an organisation. This can include disputes between family members, disputes between partners, disputes between the relevant spouses of the directors of a business, the list goes on. Good businesses have agreements between the directors and shareholders (particularly in the SME space) as to how the relationship should work. I have always advised that agreements are not there for the good times, they are there for the bad times.
13. Failure to prepare a business plan
Again this comes back to the teachings of Stephen Covey in not “beginning with the end in mind”. A business plan prepared prior to starting up a business makes you think about all the areas of the business and plan for those outcomes. Planning and mapping out the process will provide clarity and a sense of urgency to achieve your business goals. We don’t plan to fail, but we do fail to plan. There is a direct nexus and correlation between businesses that fail and the lack of business planning.
14. Failure to manage cash flow
Cash flow is vital for all business operations. I liken cash to blood within our bodies. When you run out of blood, you die. It is all very good to appear profitable in your accounts, but it is not good if those profits don’t convert to cash in your bank account.
15. Inexperienced business people operating a business
I have often thought that putting potential directors of a company through a training and assessment system before entering into business would be a good idea. There is a ‘Grand Canyon sized gap’ between being an employee, mastering your trade craft and becoming a business owner. Those skills are mutually exclusive. You could almost be better off putting an experienced business person in charge of a plumbing business, rather than having an experienced plumber in charge of that same business.
Source: Small Business Failure Rate: 9 out of 10?
Poor management is the number one reason for most SME failure. The economy has certainly added its contribution to failed businesses. Sadly, with most SMEs, the fate of the business is directly tied to the fate of the business owners’ family’s wealth, meaning that a collapse of the business almost inevitably leads to a loss of a family’s hard earned wealth. This also has knock on effects on domestic relationships.
Another sad observation is the SMEs can be reluctant to seek proper advice early when the signs of failure rear their ugly head, meaning that by the time advice is sought, it is almost inevitably too late. I call this “ostrich syndrome” (bury the head in the sand, hoping the problem will go away).
About the Author
Chris Baskerville is a Partner at Jirsch Sutherland who has over 11 years in Corporate Reconstruction and Bankruptcy. Chris Baskerville has assisted many companies and people reconstruct their financial affairs which has seen those entities remaining successful today. Chris Baskerville is a Chartered Accountant, Justice of the Peace (Qualified), a member of the Institute of Chartered Accountants and a member of the Australian Restructuring Insolvency & Turnaround Association.
Photo credit: iStockPhoto.com © ChristinLola