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One of the most surprising things for me when I first started my formal career as a virtual CFO was to discover that so many business owners I worked with had little or no idea of how their business was truly performing.  Many mistakenly believed if they had money in their bank account they were doing o.k. and very often that was all that mattered to them.  I recall making the remark to a colleague in those early days that some of these business were successful in spite of the owners.  Obviously, they were all doing lots of things right otherwise their businesses would not have survived.  But it should be remembered we were in the midst of the longest boom time period Australia had seen since the Menzies era which may have helped some of them.

Unfortunately, in spite of those enduring good economic times I also witnessed a fair share of business failures – and since the GFC the business failure rate has really accelerated. When I think about the reasons these businesses failed a pattern emerged and the primary cause was always one of the following:

Since there are 10 of them, I’ve called them my 10 Commandments for Business Survival.  The all too common and potentially terminal errors made by many small-business owners.  A virtual CFO can help you avoid making these same mistakes.

Ignoring the adage ‘Cash is King’

A country builder of residential houses was always struggling for cash flow.  He did great work and his customers were always pleased, but he was terribly dis-organised and it often took him 4 – 6 weeks longer than normal to get a project finished to the point where his bookkeeper could raise his next progress claim – and then the Bank would often take 2 weeks or more to pay his invoice.  Until the money rolled in he couldn’t start on the next job because he couldn’t buy materials.  He lost the confidence of his sub-contractors and found it hard to get trades to work him because of his poor credit history.  You can be making plenty of profit, but if cash isn’t arriving in time to meet payroll and buy inventory when it’s needed, you can quickly go out of business.

Sloppy record keeping

The owner of an equipment hire business took little interest in keeping proper records about the maintenance on his hire equipment.  If he had kept better track of the hours on his machinery and the maintenance schedules he would have known that his oldest equipment had so many hours on them that they are unlikely to pass the next annual inspection without an expensive overhaul.  Instead, it came as a very unpleasant surprise when three of them failed their annual inspection in the space of six short weeks.  Good records are a key decision-making tool.  If you’re not keeping track of your business, you do not have the right information to make good business decisions.

Ignoring inventory

The owner of a business that imported drilling supplies habitually ‘filled up’ his shipping containers with additional items to not waste spare container capacity.  After three years of this practice, employees are constantly tripping over excess stock that never seems to sell.  If you end up with stale inventory, discount it and get it out of there.  Otherwise, you’re just tying up money and taking up storage space.  Have your bookkeeper or CFO calculate your inventory turnover days and work on maintaining it at industry best practice levels.

Neglecting collections

A professional services firm had over 450 individual outstanding debtors, with more than 150 of them at least 120 days old.  These 120+ days debtors also accounted for almost 40% of the total outstanding debt. The problem was that the client managers were afraid of a backlash from the client if they were firm with requesting payment and the person responsible for chasing the debt hated to make collection calls.  Nobody likes to dun people, but unless you have a systematic collection plan and make sure it’s diligently followed, some people just won’t pay.

Disregarding employee concerns

The owner of a franchised juice bar refused to pay overtime.  He thought workers should be able to get the job done in the time allotted but his was a very busy store and customers were often still being served 10-15 minutes after the designated closing time.  Employees often left unhappy over what they saw as unfair treatment.  Finally, one of them complained to the Fair Work Ombudsman which resulted in an ugly and (for the business owner) expensive investigation.  A business that has a hard time hiring and retaining good employees is doomed.  And if you find yourself the target of an employment-related lawsuit, your expenses to defend against it can be frightening.  Get expert advice on human-resource issues.  While it may look expensive, it may just save you a packet in the end.

Failing to delegate

An Italian baker thought she was the only one who could make the perfect Panettone. Then an accident that put her in bed two weeks before the crucial Christmas sales period nearly shut down the business.  It’s important to recognise that you can’t do everything.  Turn some of the job over to the best assistant you can hire and trust them to do the job, even if they make a mistake now and then.  If you insist on doing it all yourself, you cannot grow your business.

Offering something the customer doesn’t want

A young car enthusiast started a business importing and supplying after market accessories for the Toyota RAV4 SUV.  The trouble was, most RAV4 owners were women who are less inclined to spend money on embellishments or performance accessories for their car.  Ultimately, his inventory had to be heavily discounted to sell and he went out of business.  Market research is vital.  Talk to potential customers, talk to current customers and respond to what they tell you.

Letting costs get out of control

The owner of an earth-moving business had won a high value contract and was having such a great year that he bought several new trucks and a new Mercedes car – all on hire purchase finance.  He also hired the son of an employee who needed a job, even though there wasn’t quite enough work to keep another person busy.  Within a year, the contract had ended and the business was left with the higher costs and declining income to meet the increased costs.  The owner then had to go through the pain of laying-off the excess staff and lost money when he was forced to sell the Mercedes at heavy discount to the payout figure.

Spreading marketing dollars too thinly

The owner of a newly opened Malaysian restaurant in an area not known for that type of cuisine had an obvious need to promote her business.  And she did so. She placed one advertisement in the local paper, did one letterbox drop in the area and put a sandwich board out on the road verge.  Although she spent several thousand dollars on these activities her efforts didn’t add up to a marketing campaign and the business recently closed.  Failure to spend wisely on an integrated and continuing marketing plan is an expensive mistake.  In this case, her location is now a pizza parlour.

Not putting away ‘for a rainy day’

When a major road upgrade project commenced a popular fast food store had to deal with a 90% downturn in foot traffic for a 3 month period.  Although the project had been planned for several years it put the owner out of business because she had no emergency funds and couldn’t sustain the overheads during the quiet period.  As every gambler knows, no matter how good a player you are, you’re occasionally going to be dealt a bad hand.

Thankfully, not all of these examples above resulted in the owner losing their business.  However, they did all experience a level of financial stress that could have been avoided. The typical bookkeeper and even many accountants will not know how to advise a business owner the ways to avoid these pitfalls.  But someone offering CFO services will have the knowledge and experience to help you successfully navigate through them.

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