Almost daily I read about the failure of one business or another in the business section of my local newspaper. The economy is down, credit is tight and fuel prices are through the roof. Naturally these conditions place an additional strain on businesses. But generally when a business fails there were already underlying fissures in its structural foundation that caused it to crack and break under the pressure.
Businesses fail for many reasons, the most likely being one or a combination of the following:
- Lack of a business plan or failure to update the business plan to account for changes in the industry, economy and society. Business is not static. You should review your business plan annually and adjust it to take advantage of changing markets, new products and technologies, financial incentives, and customer preferences.
- Lack of current financial data or failure to fully understand financial reports. Finance is the language of business. You don’t have to be able to write it (that’s why you have an accountant or CFO, but you do have to be able to correctly read and understand financial statements.
- Lack of capital. If you’re starting a business, minimum start-up capital should be enough to cover your first six months of operation. However, once you’re up and running, don’t confuse capital with operating funds or cash flow. Growth capital should be used to grow, improve and expand your business. You should generate enough monthly income to provide a healthy cash flow and cover operating expenses. If your business is in trouble, borrowing more money isn’t the answer. If you can’t service your current debt load, you won’t be able to service an increased debt load.
To be continued