In most developed countries, typically around 10% of businesses employ less than 20 people.
Over 40% of all businesses failed in the first four years. And it would be fair to guess that as many as 50% of those would fail in the four years from then. We can reasonably assume that many non-employing businesses that are counted in these figures are people that registered a business, then find self-employment is not easy, let alone going on to build a successful enterprise, then get employed by others or go on to other things.
Now our usual subject in these columns is financial control and we’ll get to that, but it seems that whilst business numbers are growing year on year, the numbers of businesses that fail are growing almost as fast.
It’s understood that many business owners go into business for the wrong reasons. Some will open a new business with fanciful notions, without a good business model and without the understanding that the money that comes into their bank account, is not theirs to distribute as they wish, it’s needed to sustain the longer term health of the business.
We liken cash-flow to blood in your veins. You can take a little out now and again but too much and you’re gone.
So let’s consider the lot of a serious small business owner. He (or she) has a passion for their craft, is decent and honourable, wants to grow beyond a ‘one-man band’ enterprise, feels they can make a difference and has visions of a profitable business, employing a good team of people and making a decent return on investment … and achieving a better life for the family than their parents ever did.
Such owners often risk their future and much of their past in order to start a business and employ people.
Small business owners in our view deserve a better break. Political parties don’t talk much about ‘real’ support for this sector? We don’t expect government to give business owners handouts, but the more business creates wealth, the more taxes and income available for government.
We would like it to be easier to employ or let people go. We would like less paper-work and more recognition, that for every person the small business sector employs, fewer people would be unemployed. We would like recognition that without small to medium business, there would be much less wealth created for governments to spend!
The point is that statistically, if you go into business, you’ve got a higher chance of failure than most business starters appreciate. And when an established business fails, it’s not unusual to hear that the banks foreclose and sell up their assets, which could include their home. The price of failure can be very high indeed for all stakeholders.
How vital is it then for a business owner, even if their natural inclination is to say, “Oh I’ll leave the accounts to my accountant,” to appreciate a working knowledge of the factors that influence cash flow and profit. Why?
Because there are far too many businesses that are profitable, but fail because they haven’t been able to manage cash-flow.
Most business owners would say “Surely the factors that influence cashflow and profit are making enough sales with good profit margins?” Those two are important … but actually there are five other factors as well!