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Business Failure. Gavin Bramley. Business Failure. A start-up business has only a 25% chance or surviving it’s first five years only a 5% change of making it past a decade. . Risk?.
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Business Failure Gavin Bramley
Business Failure • A start-up business has only a 25% chance or surviving it’s first five years • only a 5% change of making it past a decade.
Risk? • still safer running your own business and being in control of your own destiny than it is being an employee and effectively someone else’s leverage to creating wealth. • I am big on using other peoples time (employee’s) and other people’s money (Banker and investors) to leverage your wealth but you need to be prudent about how you do this.
Reasons for Failure • biggest reason for business failure is cited as being ‘insufficient cash flow’. • In fact 50% of the businesses that failed, failed for this reason alone. • Linked with this failure are: • which may also affect the business owners families • business entity that the business operates in • The link between the owner’s personal assets that may have been ceded to the creditors of the business.
Cash Flow Problem • either your product or service is rubbish in which case you have a bad business proposition and would be better off closing down or finding something to sell that people do want, • or you have bad business practices. • I’d rather have no business than bad business. • Bad business implies that you as a business owner are actually paying people to take your goods and services off your shelves
Normal business behaviour? • All businesses need money to operate so that the staff, leases, suppliers, bank overdrafts and owners can be paid. • Where does the money come from to make these payments? • from cash sales • payments from your debtors • in the worst case scenario, from the owner injecting his own fresh capital into the business or by borrowing ‘working capital’ from a financial institution. • This is what all businesses do and it is considered ‘normal’ behaviour.
Million Rand Question • Let’s agree that the product or service that you have is in demand, so you don’t have a bad business proposition. • How is it possible then that you are making profits but have no cash flow?
Who took my money? • Your monthly income and expenditure accounts treat the sales you make on credit (but where you don’t receive the money for the next 30-60 days) as income. • Also, any asset that you pay cash for is not regarded as an expense until you write off some depreciation (might only amount to 20% of the purchase price); • money has gone missing from your bank account
Suppliers may be demanding you pay cash or on terms less favourable than you offer to your customers. Example Let’s assume suppliers are demanding cash payments or R50,000 a month for goods provided and your sales (all on credit) are R75,000 per month. This money will arrive in 60 days time because they pressured you into this arrangement stating that they would continue to buy from your opposition if you did not agree. You are in fact extending R150.000 credit before you get your first R50,000 back in! You have become their banker and you are lending them money at 0% interest and probably without any security to back it? Further…… Would you in your personal capacity lend money to a complete stranger without taking some form of security?
Consider • The reason the customer came to you might be because his credit dried up with your opposition. • Your opposition is refusing to supply him with any goods until he settles. • He now comes to you with big orders and uses your money to pay off his debt before switching back to their product and leaving you with a debt you may not recover. • This is even more likely if you extended credit without the proper credit formalities, application form, credit checks and demands for surety. • Why do this?- because you were so happy to have ‘enticed’ the customer away from your opposition! Big businesses fail too, so do not be conned into believing otherwise. • I’d rather not have the business if the customer refuses to sign sureties in your favour. The only reason he could have for refusing to sign a personal surety in your favour is if he knows his business can’t pay you.
Consequences • What happens when you extend credit to your customers on 60 days and yet you are paying your suppliers cash? • If this creates a cash flow problem for you, you will typically pay a visit to your banker and ask for working capital. Only this time, you will see how you should have extended credit to your debtors. • You will be asked to sign a surety (if you trade as a Close Corporation or a Limited company) and you will be expected to put up your house, personal savings, insurance policies and anything else you have of value to secure the bank loan.
You are standing in your debtors shoes • If your debtor goes under and cannot pay you, and as a result you cannot pay the bank (bank overdrafts are repayable on demand), the bank is going to sell off your assets to recover their money (on a fire-sale basis). • You would be lucky if the bank gets you 10% of their real value, because they still hold your personal surety and will come after you for whatever else you have • Your furniture, your personal effects, and those of your family if you cannot prove that they’re NOT your assets. • You could loose everything, your business, your personal assets and your good reputation and self esteem.
A third Mistake & solution • trading in the incorrect structure. • The correct business structure is also a solution to the problems discussed. • As an SME you must separate your business life from your personal life. • do not trade as a sole proprietor or as a partner in a partnership when risk is involved in your business transactions, • rather trade as a CC, a (Pty) Ltd or as a Trading trust as these entities will limit your personal liabilities. • buy your assets in your personal name and lease or rent these to your business. Banks lend money far easier to individuals and at better interest rates than they do to businesses. Further, you will not be asked to sign perpetual sureties that hand control over to a liquidator if your business fails.
More Solutions • If you extend credit • extend it on the same terms and conditions that a bank would do so with interest applying if the debtor fails to pay within the agreed time period. • To improve your cash flow • ensure you are receiving enough time to pay your suppliers • if you need to raise cash for your business operations • shorten the time that you allow your debtors to pay off their accounts and arrange with your suppliers to extend the time period that you are expected to pay.
Don’t sign sureties • Using the previous example this action could bring into your business R150,000 before you have to pay out R50,000. This improves your cash flow position by R100,000 and alleviate the necessity for you to sign your life away for that overdraft facility. • Rather let your creditors sign their personal assets away.
Final thoughts • Buy a business as Unique Wealth 2005 (Pty) Ltd • Previous owners surety • Open an account with another bank • If they don’t offer ask for a small loan. • Deposit and repay timeously. • Use credit cards if necessary • Raising fees, securities.
