It’s best to treat your business as you would your health – with regular check-ups and the occasional visit to a specialist. You know your business better than anyone. There might be nagging issues that need attention, but you ignore them – you’re busy, and your business model is ‘strong enough’. If you’ve ever thought this, stop and re-consider. By overlooking issues, your business stands at risk.
Common causes of failure
Many Australian SMEs lack basic governance controls that protect their businesses from failure. They navigate tough conditions with little financial support and few options to test their companies’ health. For instance, the ASIC received 9,465 initial external administrators’ reports between July 2015 and June 2016; within these, the most common causes of failure were inadequate cash flow or high cash use (46%), poor strategic management of businesses (46%) and poor financial control, including the lack of records (34%). These responses are common, however, due to the nature of the reports, they lack detailed analysis.
Exploring the notion of cash flow, problems involve a combination of poor working capital management, poor credit risk assessment of customers, poor supplier and banking relationships, a lack of access to capital and a lack of systems to manage these issues.
Many businesses struggle to optimise how they pay suppliers and receive money from customers – including revising both their bank’s transactional products and their own financial systems. This, combined with a loose grasp of credit risk assessments, mean SME’s can be overly trusting of their customers – when many defaults come from some of our oldest clients, how do you determine whom to trust?
Additionally, some businesses fail to maintain strong relationships with their suppliers and banks. Banks are the centre of all working capital, and negotiating favourable trading terms with suppliers is vital to a business’ health. These strained relationships are usually signs of limited access to long term capital, signifying that the company is not ‘investor ready’.
When it comes to strategic management, ask how the company runs the functions within its governance structure – including sales and marketing, HR, Research and development, Financial Control, Quality Assurance, Information Systems, etc. How does the organisation make its decisions across these groups? Good governance can mean a lean and efficient team. Bad governance is the death knell!
This is one of the most perennial stumbling blocks with SMEs. The problem can be as simple as limited bookkeeping and inadequate resourcing to more complex problems – like the lack of budgeting to poor credit policy.
There are many reasons why a business fails outside of the areas mentioned above; these typically fall under five pillars: macroeconomic factors, microeconomic factors, governance, risk management and strategic focus.
What would a medical for your business look like?
An external, independent analysis is normally the best way to go (like visiting the GP). Break your concerns down into things that you can control. Identify the categories that you can personally influence and focus on the categories that have optimal probability of being able to ‘move the dial’.
Start by listing down the things that are not optimal and put in a plan to fix them systematically and methodically. While sometimes you can do this yourself, spending time fixing little things will distract you from the bigger picture. It may be better to ask for help.
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