Tackle financial problems before it’s too late
What a business owner can do if their business is struggling?
Summarising this article, it is often easier to look back after a business has failed and identify why, than it is to save a business from failing in the first place. Business founders usually have not a objective view on the reality of the business.
Financial analysis is the key. It depends on many variables:
- what industry it’s in,
- where it’s located,
- what the size of the business is. scale can often play a huge part. There are many struggling small businesses out there, including micro businesses.
- what stage of its lifecycle it is at.
Do you know your break-even point?
One thing many businesses fail to do before even setting up business is a simple break-even analysis.
A business broadly has two types of costs – fixed and variable.
- Fixed costs are largely fixed in nature. This means you’ll have to pay these whether you sell one item or one million. While all costs are variable over time, rent might reasonably be regarded as a fixed cost. You will have this cost even if no customers walk in the door.
- Variable costs are simply those that vary with your sales volume. If you are a wholesaler or retailer, the cost of your product might be a variable cost.
So, tip number one would be to understand your break-even sales point (on a yearly basis) and then break this down to a daily or weekly basis. For example, how many items do you have to sell each day or each week? Then develop and implement strategies to help you sell more than this quantity.
Can you afford to grow?
Do you have the necessary cash to fund that growth? Do you know how much cash you’ll need to fund your desired growth?
You need to know your working capital burn rate. Sales generally don’t fund themselves. For some businesses their working capital burn rate can be quite high. These businesses will struggle to fund rapid growth. For others it can be quite low, in which case they will have an easier road.
What are the financial drivers of your business?
Every business has what I call financial drivers. Various businesses respond differently to a given intervention.
- Some businesses are volume driven – they perform better the more goods they sell.
- Others are margin driven – they don’t necessarily need to grow at the same rate, but they make more profit on the items they sell.
How your business responds will depend on a number of factors, including the current size of your business and your break-even level.
Some businesses require large amounts of working capital (for example, stock and debtors). And they can therefore respond well to small improvements in working capital management. Others may have what is called a lazy balance sheet, with a number of under-performing assets.
The key measure of business performance
Finally, you need to focus on the key measure of financial performance. In my view, this is Return on Capital Employed (ROCE). Understand how much capital you have invested in your business and focus on deriving an acceptable return on that.
If your ROCE is not acceptable, you’ll know where to focus your attention.
- Is your profit margin too low?
- Do your sales need to grow?
- Are you expenses too high?
- Do you have poor working capital management?
- Do you have a lazy balance sheet?
- Are you paying suppliers too quickly?
The answer is usually there somewhere.