Avoiding a Financial Crisis: How to Keep Your Small Business Alive
Summary:
Having a superb
product, soaring sales, and stupendous customer service are undoubtedly some of
the things that go into making a successful business. But all of this is
irrelevant if you suffer a financial crisis. Without a sound stable financial
position, the slightest shock can be enough to send your business crashing to
the ground. So what can you do to ensure that all your hard work is not in
vain?
Keywords:
small business
financial crisis
Article Body:
Having a superb
product, soaring sales, and stupendous customer service are undoubtedly some of
the things that go into making a successful business. But all of this is
irrelevant if you suffer a financial crisis. Without a sound stable financial
position, the slightest shock can be enough to send your business crashing to
the ground.
So what can you do to ensure that all your hard work is not in vain? What can
you do to make sure that a financial crisis doesn’t rock the boat or even sink
it? Let’s take a look at what can cause these jolts and, more importantly, what
you can do about it.
Poor Record Keeping and Administration
Business owners are usually not good record or bookkeepers! People who start
businesses are the ones who have great ideas, see a gap in the market, or have
the personality to sell anything. They are not people who jump out of bed in
the morning and say “Great, it’s a VAT and paperwork day today!”
If you are to keep your business on the straight and narrow then you have to
accept that there are going to be days like this; you can’t avoid it. You must
keep records of your sales, your purchases, how much you have, and how much raw
material or finished goods you hold.
Without these records, you will very quickly lose track of where you are. You
won’t know:
• What you have spent your money
on
• You won’t know where your cash is
going
• You won’t know where all your stock
is – has someone stolen it? Who knows?
You are effectively working in the dark and this is not conducive to financial
stability. So what sort of records are we talking about? Nothing sophisticated.
It can be as simple as a book with one page for your income and another for
your expenditure. At least once a month total it all up to see how much money you
have made (I hope!). There’s a saying. ‘The people who keep records are the
people who break records’ – so true.
Not Watching Your Bank Balance
Do you know exactly what your bank balance is today? Why is it important?
Because if you are going to write a cheque you must know whether you have the
money in your account. If you don’t that nasty Bank Manager may just bounce
it.
Obviously, this can hurt your reputation; your credit will
be damaged and you may struggle to get support from your Bank and suppliers in
the future. All because you didn’t check what your balance was.
To avoid this make sure you keep a running total in a cash book of what you
have on your account. Why not sign up for Internet Banking? These days all the
High Street Banks make this facility available, so there is no excuse for
losing track of where you stand.
Poor Cash and Credit Management
Closely linked to keeping an eye on your Bank balance is how you handle your
cash flow. There are 3 aspects to this.
1. Don’t be tempted to keep too much at
your home or on your business premises. You could lose it to thieves, fire, or
flood
2. If you are doing
‘business-to-business’ sales then you may be faced with having to sell on
credit. If so then be disciplined in chasing up any outstanding payments. You
can’t afford to be embarrassed about asking for a cheque. If you have agreed to 1
month credit, why wait for 3 months? Chase as hard as you can because remember
you have your own debts to pay!
3. You may be lucky to have a period
of credit granted by the people you buy from. If they give you one month’s
credit, then stick to it. If you decide to hold onto your bills before paying
you may be faced with a Solicitor’s letter. Don’t ignore the problem and hope
the phone calls will go away - they
won’t!
No Cost Controls
To keep yourself in a strong financial position shop around for purchases you
have to make. Compare prices and specifications. Have an upper limit beyond
which you will not pay. Always be on the lookout for a good deal.
Spending On the Wrong Things
Running your own business can be a very powerful feeling! You may be tempted to
spend on anything but the business – a new car, flash clothes, a new kitchen.
Well, you have to look the part, don’t you??
During the early years and even when you are established make sure you spend
your hard-earned cash on the right things. The trappings of success may not be
right at this stage of your business life. Your business, for it to
grow, needs cash. Remove the cash and you remove the lifeblood that keeps
your business alive.
You have to be disciplined in your expenditure and ask yourself the question,
‘Will this cost add anything to my business?’. Don’t act on impulse; go away
and think about every large expenditure. If the answer to the question is no,
then you should think twice about spending.
Failing To Make Cuts in Time
Failing to make the necessary cuts to ensure the survival of your business is
something you cannot afford to do. If you spot you have a problem do something
about it! Don’t sit back and hope things will get better; the chances are it
won’t.
If you have a product or service which is not performing and it’s costing you
money don’t try and dress it up – be ruthless and cut it out. Make your
decision quickly; don’t hang about. Not acting fast will only compound the
problem.
Depending On a Small Number of Customers
Having a small number of customers is not a problem when everything is going
well, but if one or two leave you or fail to pay up on time, then this can
cause problems.
If you depend on 3 customers and one of them leaves then you are faced with a
33% reduction in sales. Unless you can replace him immediately you may not be
able to cut your overheads quick enough to avert any crisis.
You cannot afford for your business to be held to ransom. Try and diversify as
much as you can. Get out there and get new customers.
The same applies to businesses that rely on only one or two products. A shift
in public tastes can leave you high and dry with unsold stock and no
business!
Not Having a Budget
One good financial discipline is to have a budget. At the beginning of each
year sit down and, based on your previous year’s income and expenditure, set
new targets. Look to see where you can cut back in expenditure or even what to
cut out altogether.
Armed with your budget you will have a guide to work to. This will be a second
check before you make any large unnecessary purchases.
Having a budget will provide discipline to your expenditure. At the end of
every month update it by including your actual income and expenditure then
compare your budget with the actuals. Going through this exercise will give you
more focus and what your business is doing. It can help you put things right by
highlighting the problem areas.
No Contingency Plan In Place
Bigger businesses need to have a contingency plan for all parts of the
business. A contingency plan is basically a plan which answers the question,
“What would we do if this happened …?”
What is your “if”? What if you lose your premises? What if your computer goes
down?
For a small business, the biggest risk is you! What would happen to your
business if you fell ill or even died? Most small businesses are totally
dependent on the owner. You do everything!
If you are ill enough for one or two months that you can’t work who will see to
the customers? Who will get new ones? Who will see to the paperwork? Who will
collect the money owed to you?
These are important questions you must answer now. You have to identify someone
who could fill in for you if you are to avoid a potential financial crisis.
Your next step is to write a manual on how your business works and outline
all the key processes. If something does happen then at least there is a path
to follow!
Not Talking To Your Bank Manager
As soon as most people see a financial crisis looming the person they try and
avoid most is their Bank Manager! If they see him walking on the same side of
the road they will cross to avoid bumping into him.
The Bank Manager is usually the first person you should speak to. Bank Managers
like to be kept up to date with what is happening in your business. They don’t
like surprises. It’s when they are kept in the dark they make decisions that
can have a major impact on your business.
You must resolve to talk to your Bank Manager the moment you suspect there is a
problem. Who knows, he may surprise you by offering to do something to
help!
Financial problems can usually be avoided by taking a step back from the
business and thinking about what can go wrong. Once you know that, then you can
take action to put preventative measures in place before it’s too late.
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