Lessons from failed companies for SME
An excerpt from ‘Surviving the Storm’ by Jodie Nolan.
“This excellent book is a much needed how-to-guide for all investors, large & small. The no-nonsense approach tells you how it really is from someone who has been on both sides of the fence.” Ken Wright, Former Head of Westpac Investments & Insurances and Award winning author of ‘The People Pill’
Out of every failed business, corporate collapse or bankruptcy there are some bold and valuable lessons for the business owner to take away. Picking over the remains of a company, hindsight is a wonderful tool to shed light on what went wrong and what you can do differently in your company to ensure you don’t meet that same fate.
Your business model must be robust
I’ve often heard that a business is a reflection of its owner. How would you like your business to be perceived? Do you have solid fundamentals, history and values? What perception are you creating to the world?
Your business model, strategies and procedures must be strong enough to survive unprecedented business cycles and not leave you exposed to changes in markets, client buying patterns or technology.
Identify a worst case scenario for your customers, suppliers and staff. What is the worst thing that could go wrong? Plan for that.
Being in the financial/investment world, the worst case for me was the Global Financial Crisis in 2008. Having lived and advised through nearly 20 years of financial markets (tech wrecks, 911, dot com bubbles, subprime markets etc), I never thought the world markets could fall as far as they did in 2008 (in 16 month period the ASX fell over 50%), it meant the whole world would need to be collapsing financially – but it did, and experience is now a lesson.
Something to consider early in your business life is how and when you intend on getting out of your business. This process is called succession planning, and while you may feel you will have your business for many years, it is important to still consider at what point you believe you will sell or step out.
In my experience, many small business owners find themselves trapped in an unsellable business because the owner is so personally involved in both the customer service and administration that it makes it almost impossible to find a new owner to replicate the set-up. Ideally, if you are able to build your business to a level that you are not the only person involved a few things happen:
1. You are in a much stronger position to either create a better work/life balance.
2. You are able to instigate a succession plan to allow you to sell the business, realise any profits and move on either to another venture/retirement or potentially step out and draw said profits/dividends/income as the business continues without you.
If you aren’t synonymous with your company, then potential buyers can be confident that your business will run without you. You also need to consider how you market and sell your products or services. Can you hire a sales team? Can you work in a joint venture type agreement with another like-minded firm, cross promoting your products?
I know of two businesswomen, one who had a successful creative design firm, and the other a successful marketing company. They kept their companies separate, but worked together on seminars, workshops, large clients and utilised each other’s database. It created a pipeline of workflow that was first-rate, cemented relationships with their ideal clients and the collaboration allowed their customers to feel there was a huge team looking after all their needs.
In addition, you need to manage perception with all your customers. People only want to align themselves with winners, so ensure all correspondence and communications have a positive, successful tone.
You might also consider becoming an expert in your field in one particular area, rather than spreading yourself too thin across many endeavours or projects. In this case, you don’t want to be known as a mediocre “Jack of all trades, master of none”. So, don’t generalise, specialise! Focus on doing one or two things really well and you will definitely stand out from your competitors.
Put your money into things that matter
As outlined in earlier Smart Small Business chapters, one of the first things you need to enhance is cash flow, not just for business viability but also for sustainability and ultimately saleability. Creating a positive cash flow cycle will not only allow you to grow the business accordingly, to free you up or replace you as sole proprietor, but also allows any potential acquirer to pay more for your business because they don’t have to commit funds to working capital. It is a win/win.
Consider ways to improve cash flow. Can you ask your customers to pay half-yearly or yearly in advance for your service like a magazine subscription? This would ensure you get to use the money upfront, rather than providing the service and then waiting for payment. Once you have standardised your service then consider charging upfront or use progress billing to create a positive cash flow.
Expansion is gold, but not at the cost of your company
I’ve taken some time to research the many reasons why companies seem to go into liquidation and often it is a result of too much, too soon.
Don’t let your company end up on the cutting room floor. Understand your financials, figure out how many pipeline prospects and leads will likely convert to sales. Not only is this figure important to know when you go to sell (or borrow etc), as it allows a potential buyer (lender) to estimate the size of their market opportunity, but it also allows you to adequately plan for periods of slow sales. (You’ll find the details in understand your four key financial statements and performance ratios in the next chapter).
When do your sales typically drop, is it cyclical or seasonal? Plan to have enough cash flow to support and sustain your business through these slow periods. This is particularly important for those who rely on sales or commission based incomes. Do not become a spendthrift when money becomes available, it is important to grow your business steadily and always ensure you have cash buffers available to meet all your expenses regardless of what the economy, buying patterns and consumer confidence is depicting.
Don’t be arrogant in business
It has been my experience that many business owners believe they are the only ones who can do a good job. They find it hard to delegate responsibilities and tasks and believe it nearly impossible to find good, reliable staff. While this can be the case, and many small-to-medium business owners say staff issues is one of their biggest headaches. Consider job share if you can only afford one position. Finding naturally competitive people ensures they will try to outdo each other.
Hire character and train skill. Only hire sales people who are good at selling products, not services. It is about making the product meet the client’s needs at the outset, rather than trying to change the product to fit the customer which is time consuming, costly and fraught with problems. There is a quote by Anthony Robbins which I love: “People are motivated to change either by desperation or inspiration”. This is so true – instead of waiting until you become desperate, find inspiration around you. Locate successful business owners who are keen to mentor you and help you discover, implement and prosper with change.
Be prepared to learn new things. Our world is moving at such a rapid rate, don’t be afraid to change and accommodate new technology, new trends and new ideas. Try not to be arrogant or cynical about business as this can end up shaping your thoughts and dialogue when times are tough. Staff and customers pick up on your negativity/outlook so try to remain positive, focused, ready to change and adapt, regardless of the business weather.
Work/life balance – what’s that?
If you are like many business owners, you went into business for yourself because you thought it would give you a work/life balance, the freedom to spend your time how you chose, work around school hours or sporting commitments. What you have probably found is that you have never been more busy, never been more stressed and are not sure what happened to your life, let alone your work/life balance!
Most business owners find it hard to step out of the picture for a minute and reflect on their business. Does your business rely too heavily on you? Are you everything to that business, can it operate well without you?
The keys to making your business truly successful are this:
- The product or service is teachable and valuable.
- You can repeat it consistently and others can too.
- You have a full understanding of the business financials, ratios and performance.
- How you do anything, is how you do everything.
- Everything is automated where possible and recorded by way of policy and procedure manuals.
- You think big and plan in the beginning, with the end in mind.
- You understand how your pipeline prospects convert to sales and strategize accordingly.
Everyone is different when it comes to work/life balance. But when you can ultimately take time away from your business, be it an hour, a week or a month, and it all runs smoothly regardless – you are free to focus on the things that make your life fun.
When things are tough or going pear-shaped
The best place to begin preparing for a downturn in business is to work towards where you want to be when things pick up again.
- Are there better ways to structure the business?
- What type of customers do you want to work with?
- How will you market/sell your product or service?
- What resources will you need to deliver products and services and how will you deliver them?
- Where will you operate your business from?
- What price and cost structure will exist?
- How will your business be funded? Will external funding be required or will it be self-funding?
When times are good most business owners spend little time worrying about every cent. However, when sales start to fall or leads dry up, this is the best place to start as it allows you to tighten the purse strings so to speak, to assist in cash flow and inevitability find ways to stop unnecessary outgoings.
Look at direct costs incurred each week, such as cost of products for sale and labour costs. Are there alternatives or better methods of delivering your product or service? Do some research here, what are your successful competitors doing?
It is also good money management when times are tough to work your way through every line item on the profit and loss Statement. Time put aside to focus on this issue can be some of the most profitable time you will spend in your business. It may seem tedious, but when every cent is coming out of your pocket as a business owner, it’s worthwhile. Consider how can you everything ‘better’, more efficiently and more cost effectively? Lots of self-discipline is necessary and a little shrewd ruthlessness as well.
It is important to remember that in relation to cost savings, every dollar saved is a dollar straight onto your bottom line. Whereas every dollar of extra sales may only be a matter of cents onto the bottom line, because every sale typically carries with it direct costs and overheads. In tough economic times, cash flow also needs serious attention – especially those businesses which hold stock. This area needs to be closely managed to ensure the purchasing standards are astute, perceptive and proactive. Ensure only the stock which is required is purchased. If you are purchasing stock on credit terms you could get a double whammy of reduced sales and collections at the same time as paying for stock that is taking longer to sell. You need to know your ratios and make sure you don’t have inventory sitting on your shelves longer than it needs to be, otherwise it will be costing you money. If you can measure it, you can manage it.
Make hay while the sun shines and when the weather turns nasty you have properly proofed your business ready for the storm. Your business will also be in a far stronger position than competitors who haven’t properly managed and prepared for downturns. Then, when the upturn arrives, which it always will, your business could be in a stronger position than ever before!
Focus on what really matters:
- Set time aside to work on your business not just in it.
- Think outside the square – what can you do differently to your competitors?
- Be innovative.
- Decisions + actions = results.
- Implement and maintain business budgets.
- Understand what your profit drivers are.
- Understand and monitor your key performance indicators (KPIs).
- Link crucial KPIs to team performance and remuneration.
- Constantly revisit business and marketing plans, your existing suppliers and also the policy and procedures manual.
- Nurture and respect your customers and clients consistently.