While many business commentators argue that 95% of all business failure can be attributed to shortcomings in management, in my experience as an insolvency specialist, I say it’s more like 100%. It is my view that the downward spiral of a business can always be traced back to inaction or bad decisions made by management.
10 steps to a healthy business
Now I know that I am speaking as a lofty generalist when I say this but, when handing out insolvency advice, management is the only place where the art of business can be simplified into rules. Following these simple steps business owners can gain a valuable understanding of how to avoid insolvency and maintain good business health.
1. Maintain good business records:
I’ve blogged about this before. Business is about the creation of wealth. Wealth is measured in dollars and cents. Read and understand the accounting records that have been prepared and respond as they may direct. They are the flashlight in the dark corridor of insolvency.
2. Do not break the law:
See the law as enabling and work within its boundaries. Take and use the sense of empowerment that flows from that entitlement.
3. Do not tolerate laziness or improper behaviour:
Expect everyone to pull their weight and understand their role in the business. Employment is a positive act of engagement to facilitate an outcome. Be a responsible employer as the law requires but be intolerant of employee failings that are inconsistent with the rightfully determined purpose of their employment.
4. Give value:
Do not cheat your clients but rather provide the good or service in a way that calls for positive remark. Exchange in abundance and leave not only a satisfied client but the potential for them to tell another of their positive experience.
5. Be scrupulously honest with suppliers:
Only take credit in the honestly held belief that it will be paid when due. Treat your suppliers as you would wish to be treated.
6. Pay required taxes:
Tight cash flows are not an acceptable justification for ignoring the obligation to pay taxes as they fall due. The non-payment of PAYE and GST are criminal offences which may result in convictions if action is initiated.
7. Look for efficiencies:
Strive to minimise waste and unnecessary cost. Constantly search out ways of improving processes and increasing accountability. At all times be prudent and expense averse.
8. Be mindful of inventory and receivables:
Inventory is only as valuable as it can turn into money at some time. Manage that asset class as if it is money and be mindful that the preservation of its value must be constantly monitored and liquidated as quickly as possible. In the same way, be aware that an obligation owed to you (account receivable) is of no value unless it is paid. Be precise when establishing trading terms and expect compliance by taking immediate action when your debtor has let you down.
9. Hedge against loss:
Make sure inadvertent loss is covered by placing the assets on risk through a competent insurance broker. Supply only to credit worthy customers and do so on terms of trade that provide for a security interest to exist in the items supplied. Ensure you obtain your entitled priority by the registration of a financing statement on the personal properties securities register.
10. Be careful about capital purchases:
Cash flow is not profit and should not be seen as a spring from which management can drink. Before committing to those hire purchase instalments put up a case to the companies accountant for a fitness check.
It is harder for a business to come back from insolvency than it is to prevent it from getting there in the first place. At the first sign of trouble a business owner should seek insolvency advice from an insolvency specialist. Timing is critical. The sooner you act, the more likely that business recovery will be a viable option.
As business recovery professionals, BWA Insolvency are dedicated to helping NZ businesses in all aspects of business recovery and insolvency advice from voluntary administration to liquidation. For more blog posts on insolvency matters click here.