How to fail in business

Tens of millions of people from all walks of life have considered starting their own business. Millions of people have actually done it. Hundreds of thousands of people are still in business today.

It is sad but true that many companies fall by the wayside too early in the business. However, some make it and thrive. Most entrepreneurs don’t start a business without giving it a lot of thought. Clearly, though, it takes more than careful thought to overcome those entry-level barriers.

There are many factors that contribute to longevity in business, and each factor will have its merits for a specific type of business and the characteristics of the people who run it. Rather, most businesses tend to fail for a handful of reasons. So learning to fail is a warning of the dangers.

Cash flow and planning

Cash flow is by far the number one reason for business failure. Before we can discuss cash flow, we need to understand what it is. Cashflow is the balance of the cash inflow and cash outflow. By cash, we mean cash – the money in your bank. Cash flow is not a measure of how much your customers owe you for work performed, or how much you owe to your suppliers and other creditors. However, these are essential aspects of cash flow forecasting.

When cash runs out, in simple terms, the business can’t do what it needs to do to continue. You cannot, for example, pay suppliers, salaries, loans, bills, etc. Therefore, it is vital to forecast the possible cash flows within the business to determine any potential problems that may occur. The company may be facing a large payment from vendors next month, is that likely to leave it short of cash to pay for other essentials? If so, what should be done to overcome this problem? This isn’t rocket science and you don’t need an accountant or bookkeeper to provide the answers. It’s no more difficult than planning the workload. In fact, it is the planned workload that business owners should look at first.

Retail businesses need to have an idea of ​​their daily sales and their expected percentage profits. Let’s say gross profit, not to be confused with profit margin, is expected to be 40%. This means that the cost of sales, for stock, deliveries and the like, will be the remaining 60% of the collection. For £1,000 in revenue, the cost of sales will be on the order of £600. This leaves just £400 to pay for all other expenses such as rent, wages, bills, fees, insurance etc. This type of business will usually need to buy or store before you can sell it, as well as the cost of facilities, fixtures, and perhaps transportation.

Service providers must forecast the services that will be provided and the likely costs associated with doing so. In this type of business it is not so necessary to buy a lot of stock in advance, but it is likely that there will be an outlay on tools, premises and transport. So there has to be a certain level of income generating work to cover the fixed costs. Upon taking over the job, additional costs will be incurred to purchase the raw materials needed to perform the job.

For any type of business, the expected income and expenses must be outlined, certainly during the first year, in periods of at least one month. At the end of each month, the actual cash flows must be measured against the forecasts. This will allow timely adjustments to ongoing forecasts. After the first year, it may be possible to plan in quarters.

The art of doing this is known as business planning, and this is where the Business Plan document comes from. Many people consider themselves ill-equipped to create a business plan and therefore rely on professional services to do it for them. By doing this, people risk losing touch with their own business.

Business plans don’t need to be attractive, unless the business sells lingerie and the like.

Seriously, the only person business people need to completely impress is themselves. After all, he is the owner of the company that is ultimately being compromised. Banks will want to see a business plan, but most won’t bother to read it cover to cover. Banks are interested in likely cash flows. Sure, they’ll ask questions about the intended business, but they’re asking the person in front of them. They do not look in the Business Plan for the answer. So, the Business Plan is the owner’s tool.

A business plan is simply a document that brings together all the ideas and plans a business owner should already know in one document, along with the cash flow forecast. The Plan will determine the type of business, likely customers, demographics regarding potential customers and competition, outside influences such as government policy and economics, facilities, transportation, capital, etc. For beginners, it will show all the possible obstacles that the business will face in the first few years and how it will overcome them. This writing must not be subcontracted to another person. It is through the planning process that the business owner implicitly understands his business. In turn, this planning process drives a cash flow forecast. This is where we put a cost on things that are being planned. The Business Plan and the cash flow forecast must coexist.

The Business Plan and cash flow forecast should not be put aside after the business starts or after an expansion plan or other major change is executed. As time progresses, what is estimated and speculated in the Business Plan becomes a known reality. These emerging facts can drastically change plans and cash flow forecasts. Many people keep this information in their heads because they live and breathe the stuff every day in the course of their business. For example, if a major competitor goes out of business, they don’t bother to rewrite the section of their plan that identified that competitor. The Business Plan must be reviewed, at least every six months, if only to read it. The act of doing this could spark new ideas based on newly discovered insights. It provides objectivity and something by which the success of the business can be measured.

So to answer the question, to fail in business, owners need not worry about business planning. They must be out of context with your business and the environment in which it exists. They must know little about their customers and suppliers and, more importantly, about their competition. Owners will not have much of an idea of ​​how much income is likely to be received and what their outlay will be. Because of this, owners cannot forecast future income and expenses. They will be continually bombarded with unplanned events and related expenses to the point that the money in their banks will be depleted. This will prevent them from pursuing their dreams and aspirations and instead can lead to frustration and stress-related illnesses.

That is! There could be arguments for all sorts of other reasons why businesses fail, but most tend to go back to the old cash flow problems, coupled with a lack of business planning. Many entrepreneurs, especially now, are suffering from the effects of the economic downturn. Business planning and cash flow forecasting are the key tools, not only for survival, but also for sustainable competitive advantage.

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