Is your business model fit for success, or is it on a downward spiral?

February 2019

Having dealt with all kinds of businesses for over thirty years, the old adage remains true that “ cash is king”. Indeed, a lack thereof tends to be the main reason for business failure. However, every business is slightly different and has its own model against which key performance indicators can be used to judge progress. One or two negative signs do not necessarily mean that financial failure is inevitable, but the more signs that are in evidence without corrective action being taken, the higher the risk of an unwelcome downward spiral.

My insolvency team are consulted on a regular basis by worried business owners and this allows one to spot some of the tell-tale signs of a business in difficulty. Of course, someone seeking help does not have to heed advice, particularly if the advice provided is not what one wishes to hear, but experience shows that where tell-tale signs are not dealt with efficiently and effectively, the team’s follow-up call a number of months later is the beginning of a more formal insolvency process.

Without a doubt, reliable and timely management information which charts business activity and financial results is as important to a small business as a large one. Very often, you find that you are working in the business rather than on the business and fail to see the big picture before it is too late. In this regard, it should be stressed that if the person leading the business is not particularly comfortable with standard management accounts, there is nothing to stop a different financial presentation which focuses on the key issues : perhaps in the form of either graphs or pictures. The fundamental point is to highlight trends that require to be addressed.

As noted above, cash is king, and thus effective credit control and cash utilisation is equally crucial to ongoing success. Research has shown that one of the main reasons why businesses do not get paid on time is because the owner feels that they might be upsetting a customer by pressing for payment. The reality is that if you aren’t being paid why should you worry about upsetting the customer : you can’t afford to keep that type of business anyway. If your family depends upon the success of your business, why put their future at risk by being shy about positive cash flow ?

Typically, management information will highlight the key costs involved in running your business. These should be reviewed regularly with a critical eye in order to ensure that they are justified and perhaps make you think if there might be a better way of achieving the same result.

Nobody makes the correct business decision every time. Most successful people in business know their strengths and are happy to accept advice from others who have suitable knowledge/experience. Being headstrong and not listening to anyone is unlikely to promote success, because nobody is an island and every business is dependent upon others.

Another tell-tale sign when looking at a business is the attitude to quality i.e. is there a consistent and high quality attitude towards the business product/service or does nobody really care as long as you can leave by 5 pm ? If he is thinking of quality, a window cleaner will not enjoy a significant level of repeat business if he leaves streaks/marks on a window and knocks the heads off the householder’s prized roses when placing his ladder in the garden.

As both the owner and the business become more mature, some people find it difficult to accept change to existing work practices meaning that inefficient systems are retained e.g. why use a fax when an email is both quicker and more direct ? Accordingly, one must be flexible, understand why change is beneficial, and act accordingly.

Discussion with many business owners often reveals an inability to delegate effectively, coupled with an overdeveloped sense of self perfection. Don’t spend the whole day running around in ever decreasing circles thinking that nobody else can do what you do. After all, there will be competitor businesses out there and thus, it seems logical that others can provide a very similar product/service. Thus, consider recruiting high quality people, delegate empowerment and let them grow the business for you.

Another issue which can sometimes drag a business down is the inability to communicate, or the general lack of communication. It is a fundamental aspect of any business that those within the business, together with external business partners/contacts understand what the business is trying to achieve. An owner may find it terribly frustrating to see everybody acting in a particular way because he has not communicated how he wishes the business to operate. That is not to say that one discusses trade secrets, but merely ensures that everyone involved with the business is pulling in the same direction.

These general thoughts reflect consultations with all types of businesses. There is no divine right to be successful, but planning, taking advice, working effectively and acting promptly tends to create conditions conducive to success. Are you in that group of people ? If not, it is rarely too late to ask for help.

The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen. They do not purport to represent those of the firm in general.