| "Up to ninety per cent of businesses fail in their | | | | bank at the end of the day. |
| first five years of operation" The first time I | | | | Avoiding Premature Demise |
| heard this was many years ago during an | | | | The enemy of businesses is debt overload. If you |
| accounting seminar. At that time, it sounded | | | | are the owner or CEO of a business you must |
| rather unbelievable; however, I now believe those | | | | keep a close watchful eye on your finances. Do |
| statistics are true and probably higher or occur | | | | you know how much debt your business will carry |
| within shorter time spans, especially during times | | | | - this month, three months, one year and five |
| of global economic stress. | | | | years into the future? Do you know how much |
| The Cause of Business Failure | | | | funding you will need to maintain or expand your |
| Of course, many people have now heard of | | | | stock levels, open a new store, or manufacture a |
| these facts, but what most unsuccessful business | | | | new product - this month, three months, one |
| managers do not know, or fail to pay attention | | | | year and five years into the future? Do you |
| to, is why their businesses fail. The statisticians | | | | know what your outstanding creditors will be - |
| say that the reasons are quite simple: | | | | this month, three months, one year and five |
| inappropriate or lack of necessary marketing | | | | years into the future? Do you know what your |
| programs, and/or inappropriate or lack of | | | | outstanding debtors will be - this month, three |
| necessary accounting systems. That's it! It doesn't | | | | months, one year and five years into the future? |
| matter whether you are the owner or Chief | | | | And do you know how much cash you will have |
| Executive Officer, you need to understand the | | | | in the bank - this month, three months, one year |
| financial requirements necessary to successfully | | | | and five years into the future? If you cannot |
| manage your business. | | | | answer 'yes' to all of these questions, don't worry: |
| The basics of accounting systems are | | | | you are in the majority. Most companies cannot |
| elementarily simple. All you need to know is the | | | | answer 'yes' definitively to all of these questions, |
| real purpose of your financial reports and how to | | | | but these companies are probably also in great |
| use them to accurately assess your business's | | | | risk of going broke in the next five years - or at |
| performance - past, present and, most | | | | least having to suffer that devastating and |
| importantly, for the future. | | | | stressful daily existence of operating from cash |
| Personally, I believe the underlying issue why | | | | flow crisis to cash flow crisis. |
| businesses fail is cashflow! Or rather, lack of it. | | | | The American Statistical Association has stated: |
| Obviously, this should be all wrapped up with | | | | "A cross-sectional analysis of all trading |
| having the appropriate accounting systems to run | | | | suspensions that occurred during the period |
| your business, but I have only seen one | | | | 1974-1988 in the New York Stock Exchange |
| organisation that successfully used their accounting | | | | reveals that, though the desire to maintain price |
| systems to manage their cashflows efficiently. So | | | | continuity remains an important motivation to |
| efficiently in fact, that they effectively turned | | | | suspend trade, inventory-imbalance fears are |
| their whole multi-national organisation from near | | | | pronounced for large firms." |
| collapse to their recorded profits in only three | | | | From the Editor of we are reminded: "There are |
| years. So what is the secret behind ensuring | | | | a few simple steps you can take to make sure |
| longevity and profitability for your business? Once | | | | your business avoids a premature death. First, find |
| again, the answers to life's most difficult questions | | | | someone willing to pay for your product or |
| are often simple - and typically obvious. Cash! | | | | service. Second, hoard your cash. In the words of |
| Glorious, glorious cash. Cash is real. Cash is tangible. | | | | one successful entrepreneur, 'Throw nickels |
| The value of cash is known and reliable. Cash is | | | | around like they're manhole covers'." |
| liquidity and liquidity means having the flexibility to | | | | And from BusinessWeek: "Once a new company |
| be proactive in your business affairs. Cash enables | | | | is up and running, the most obvious cause of |
| you to become proactive rather than reactive to | | | | failure is simply running out of money. Experts call |
| economic crises. Most failing businesses have | | | | undercapitalization a symptom of poor planning, |
| forgotten the importance of cash. | | | | however, rather than a true cause of failure. |
| I'm not talking about just the physical paper, but | | | | Yes, planning. Planning, planning, planning. You have |
| more importantly, how much cash you have in | | | | probably heard it over and over again. Planning for |
| the bank at the end of the day. Too many | | | | your business, planning for research, planning for |
| businesses have gone broke when their financial | | | | expansion. Marketing planning, recruitment planning, |
| reports have told them they were profitable - on | | | | sales planning. On and on, we go. But do you do |
| paper! Cash makes the world go around. Cash | | | | sufficient cash planning and do you know anytime |
| makes your business safe. Cash helps you to plan | | | | during the next five years where your cash ebbs |
| for your future; and cash will help your business | | | | and flows will be? Not just approximately, but all |
| expand safely. But first, let us return to the | | | | planned out - on paper, on graphs? Does your |
| concept of business failure. In precise terms, a | | | | accounting system produce reliable financial |
| business fails when it ceases trading and leaves | | | | reports that connect your sales levels with your |
| unpaid obligations. This may be due to voluntary | | | | stock levels and your profits to your cash at |
| business wind-up, or voluntary or enforced | | | | bank? Do you assess your business's |
| liquidation or bankruptcy. Yet, nevertheless, the | | | | performance by profits on paper - or cash at |
| failure is due to unpaid obligations. So, what causes | | | | bank? |
| the failure? Simple, isn't it? Lack of cash in the | | | | |