This article appeared in Business World, published by Russell Bedford International. The author, Tony Carey, is managing partner and founder of Cooney Carey, Russell Bedford's member firm in Dublin.
It's sad but true that some businesses fail. When they do it's easy to assume the reasons must be financial – poor cash flow, financial information and monitoring, and weak cost controls are just a few of the financial inadequacies that can turn success into failure. But I believe the causes of business failure are often deeper and less visible; a greater awareness of, and a more focussed attitude towards, non-financial risks can save many SMEs from failure.
The wrong sales
Too many sales can contribute to business failure if they are at the wrong price with the wrong margins, unrealistic deadlines, and high overheads. A business can be a victim of its own success – sell quicker than you can finance from cash flow and available credit and you will soon run out of cash.
This overtrading can arise from inappropriate sales growth – a business might reduce prices and margins to encourage sales, or sales growth may happen when a business cannot cope with the debt or expenditure needed to finance it.
So be conscious of production costs and resist the temptation to chase turnover by cutting prices. If you decide to market a loss leader, be sure to understand how it contributes to future profitable sales.
Quality is everything
Too often businesses, in trying to reduce costs, sacrifice quality. While there can be some short-term benefit in cutting costs it can come back to haunt, even affecting the long-term viability of a business. Too much cost cutting can knock on into other areas too, affecting staff morale, quickly followed by productivity and service. Nothing worries the small-business owner more than a sudden reduction in demand, whatever the reason. Seasonal changes are less serious (unless the business is already weak) as you can predict these and manage them, but price or product competition, with new and more cost-effective distribution channels, mean businesses have to continually reinvent themselves. It's easy to justify not developing or investing. Perhaps previous product launches disappointed, maybe the business mistakenly believes its products are still competitive, maybe it lacks the expertise or financial clout to develop new products. But, like it or not, businesses must face these realities. It's the businesses that focus on markets and products, differentiate their market and product propositions, and develop low-cost production structures that succeed where others fail.
Don't put all your eggs in one basket
By all means be different and carve out a niche but be careful of relying on one market or a small client base. Don't depend on one or two suppliers either. If any of these fail, you fail too. Have viable alternatives and spread your risk.
Signs of a failing business
When the rot sets in, complacency is the killer. Slow or indifferent customer service, a demotivated sales team, ineffective marketing, poor product development, or a misplaced belief that a business can't fail are all tell- tale signs. In today's market few businesses can stand still and succeed; for most small business it's a case of reinvent or die.
About the author
Tony Carey is managing partner and founder of Cooney Carey, Russell Bedford's member firm in Dublin. Tony has over 30 years' experience in corporate finance and business advisory services. His time as CFO of a large private concern gained him valuable practical commercial experience. His specialist areas include strategic planning, corporate recovery, financial investments, project funding and negotiation.
About Russell Bedford International
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