13 reasons your business could fail

Business threats must be minimised to grow a company successfully and sustainably. Identify warning signs now and act before it is too late

Stop! Danger ahead! Last year more than 12,000 businesses went into liquidation. None of them thought it would happen. None of you think you’ll be among this year’s statistics. Some of you will be.

It’s the harsh reality of business that just when you think everything is going well, potential hazards present themselves.

In many cases the warning signs are staring you in the face – but that doesn’t necessarily make them easier to spot. They are your enemies, so stay clear-headed as the 13 – unlucky for some – signs that follow could see your company up in smoke before you can say ‘administration’.

1) Stretching cashflow

Cashflow has to keep up with your business as it grows. If it doesn’t it’ll turn every healthy aspect of your growth rotten. Your order books might be overflowing, but it means nothing if you can’t afford to pay suppliers, rent, salary and amenities until you get paid. It sounds obvious, but you wouldn’t be the first to be lulled into a false sense of financial security on the back of orders.

The warning signs should be all too clear. If your business is winning contracts and expanding, yet you’re constantly strapped for cash, you probably need to raise fi nance. If you don’t and run out of working capital then what seems like a temporary cash shortage could escalate out of control, according to Eric Savill at Barclays’ Business Support Unit.

“In the worst case scenario, when your cheques bounce, customers and suppliers will lose faith in you,” he warns. “The rumour mill will start churning and before you know it, you’ve got a bad reputation.” Global Seafood Trading, which sells seafood to restaurants, got into cashflow problems despite being inundated with orders. It paid suppliers on a weekly basis, but customers were taking up to 60 days to cough up. Invoice fi nance was the solution for the company, helping it get hold of funds a mere 24 hours after raising an invoice.

RED ALERT: You’re waiting on payments in to make payments out

DANGER RATING: 6/10

2) Bringing senior management in and stepping back

A progressive move but one with a high degree of risk. It’ll be a culture shock for staff and could cause friction as you install ‘big business’ pillars into your ‘small business’ structure. Cut yourself too loose and you won’t be able to feel any legitimate ripples of discontent. Appoint the wrong management and give them autonomy while you relax in the golf club and you could have even bigger problems.

Ex-Red Letter Days boss Rachel Elnaugh found keeping track of senior people difficult. She says it all went wrong when she took on a new CEO and FD, but failed to set up adequate reporting channels.

The two senior managers were hired in March 2002, and in just 15 months the company had turned a £1m profi t into a £400,000 loss. Elnaugh describes the FD of the time as “weak” because he didn’t report on, nor address, the losses as they mounted up, but she accepts that it was ultimately her responsibility to monitor the business’ financial fortunes closely.

Avoid making the same mistake by retaining the right to veto key decisions, set clear objectives, and implement transparent channels of reporting.

RED ALERT: Sudden shifts in direction affecting profits or if you no longer know your financials

DANGER RATING: 7/10

3) Diversifying your business unwisely

Ambition is an intrinsic part of your DNA, but overenthusiasm could be your downfall. Diversifying into new areas can easily cause needless distractions and dilute your competitive edge.

“Having fingers in too many pies will make it hard to control your workflows,” asserts Carolyn Swain, corporate recovery partner at Halliwells. “This is especially true if you spread across sectors. A restaurateur might want to launch a catering service for events, which is fi ne, but when it starts offering marquees and event management it begins to encroach on the unknown.”

There’s nothing wrong with wanting to expand and create new revenue streams, but consider what it’ll mean for the rest of your business – do you have the resources to plough complete focus into a new project? How successful will the project be if you can’t give it complete focus? Will it dilute your brand? For every Virgin Airlines there’s been a Virgin Bikes. easyGroup made the smooth transition to car rental, but selling pizza proved more difficult. It’s likely you don’t have Virgin and easy-level fi nances or infrastructures to fall back on, so tread carefully.

RED ALERT: You’re trying to run before you can walk

DANGER RATING: 3/10

4) Letting USPS slip

Don’t let go of what made you successful. Remember your start-up ethos: an emphasis on quality, first-class customer service and a vice-like grip on accounts, for example.

Your business maxims and business plan should be nailed to the back of your mind; think you can do without them and your business risks becoming nebulous and shabby.

It’s easy to believe you’ve arrived, not communicate clearly enough and fail to drum your ethos into every new staff member while letting other fundamentals slip as you grow. “It’s a basic point, but one that often escapes future-focused entrepreneurs,” says Graeme Nichol, director of consulting business Angle’s management division. “People lose sight of reality – you have to provide a service, invoice and collect money.

“The systems that run this process need to be robust. People tend to run businesses in an opportunistic way, but you haven’t done business well until you’ve delivered the product and got the money.”

RED ALERT: You’re spending too long thinking what you could be doing, not what you are doing

DANGER RATING: 6/10

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