Why? Because growing a business requires capital funding and too often we see businesses endeavouring to expand their activities without paying attention to the working capital they have available to finance that growth.
Commonly referred to as “growing too quick too soon” or over-trading, it is this combination of rapid growth and insufficient financial resources which causes a large percentage of the business failures we currently see. And this at a time when a buoyant market suggests businesses should be prospering.
Too often companies expect that growth can be achieved without the need to inject more capital into a business.
Sometimes it is perceived that by using rising debt levels with merchants and suppliers, and taking advantage of extended repayment terms – either formally, or informally – the business can remain viable and solvent.
This brings me to the aspect of solvency. There are two “tests” that measure a business’s solvency.
It is this latter test that businesses often fail to satisfy, and this can bring about their downfall. After all, the process of liquidating a company can be quite a straightforward procedure for a creditor, and not overly expensive.
Creditors can prepare their own Statutory Demand and deliver it at no cost, so this is an attractive and powerful tool for the person seeking payment of their debt.
Starplus Homes, which went into receivership, and liquidation, in April of last year was a classic example of a company which may well have been able to satisfy the first solvency test (although asset values are always open to conjecture) but struggled with the latter, which ultimately contributed to its downfall.
AVOIDING THE OBVIOUS CAUSES OF FAILURE
Of course, the above is only one cause of business failure, albeit one of the more common within the building industry.
Nick James, American business commentator and renowned authority on the subject, in an article entitled “What they don’t teach you about business failure at Harvard or Oxford”, once listed the top causes of business failure as:
Our own research into the building and related industries here in New Zealand enabled us to come up with the following list of reasons for failure:
More simply though, I believe business failure can be put down to three key causes:
So, by focusing on situations and experiences that have come about through what could be termed “bad management”, we can hopefully learn from their mistakes.
To sum up, what are the key learnings?
At the end of the day, wouldn’t it be disappointing to have navigated through the Economic Ice Age of the last few years, to trip at the last hurdle?
Alan Johnston is General Manager, CreditWorks Data Solutions Ltd, and has been involved in credit management for over 35 years. In 2011 he was presented with the NZCFI Credit Professional of the Year Award, for his achievements within the credit industry. Email him at firstname.lastname@example.org or call him on 09 520 8133 to find out more.