The seven deadly sins of small business

Small business is a tough gig whichever way you cut the corporate cake. Competition is fierce, margins are slim, loyal clientele are hard to find and harder to keep, red tape is burdensome, and good staff are hard to come by. That’s why it’s important to get some of the business basics right, just to stay in the game.

Here are seven fundamental mistakes associated with MSME (micro, small, medium enterprise) failures that I have identified over the 25 years I’ve worked with financially distressed businesses.

1. Undercapitalisation

Unfortunately for many MSMEs, capital reserves typically don’t go beyond the $1 or $2 capital contribution on initial startup. It tends stay that way throughout the life of the business. If the business is conceived on credit, and payables lead receivables, this can leave the cash cycle “always playing catch up”. This can become a major issue should a significant event such as a major bad debt or unforeseen sunk cost occurs, and if its considerable enough it can cause solvency issues. In fact, if there are no capital reserves or other sources of capital to call upon, endemic insolvency can manifest. It is typically the case that when capital is needed most, it is hardest to secure, and such obstacles are often greatest for micro and small businesses; all the more reason to watch the business’s pennies closely and to regularly plan for that rainy day.

2. Mismanagement

The focal point of management needs to be the efficient and effective use of the business’s scarce or limited resources in order to make profits. In an ideal world, each and every resource invested into your business should return a net gain, and that includes every single widget that is used to deliver your product or service to your customer, both tangible and intangible. It is no different for a micro or a massive business; every management decision that results in money being spent needs to result in money being made. Big spends need to be planned carefully to fit the business operationally, tactically and strategically, while small spends need to be critically reviewed, line by line. One poor management decision can cause significant issues for MSMEs.

3. Not planning

How often do you hear “you need to plan”? And yet most small businesses don’t do it (and don’t do it at their peril). There needs to be purpose to your business; a plan gives you that purpose. It can be as simple as a quarterly cashflow budget or a more sophisticated business operational plan that includes specific, integrated plans for each core business area. Plans become all the more relevant for micro and small business in the initial stages of their life cycles, given the amount of hard work required to get up and running. It’s not uncommon for owner-managers to be working longer and earning less than if they were an employee elsewhere (or worse still, less than one of their own employees). But we as business owners do this for a future reward, don’t we? You may get there without a plan, but it will be a longer and harder route.

4. Failing to reinvest

Success needs to be managed carefully as with all aspects of business. Success has its rewards, but it also can deliver its own unique problems and challenges. For instance if your business grows too quickly, it can lead to over expansion and a tendency to over spend surplus cash; management may relax from the business plan and invest in non-core activities. Then, if business activity increases, scarce resources can become harder to find, be it people, finance, equipment or raw material, and this can lead to financial distress. The good times tend to be there to get us through the bad times and should not be wasted; capital from profits needs to be reinvested in the business. Nurture your business like it’s a child, because that ‘rainy day’ will one day arrive. You need to identify the reason for your growth or success and manage it: is it because you have developed an enduring competitive advantage or is it simply due to a short/medium term opportunity arising?

5. Not playing to your strengths

Identify what your business strengths are and use them to compete; plan and operate your business accordingly. Document, develop, duplicate and adapt your strengths into your industry’s standard business model. Stay focused on your strengths and don’t move too far away from these core competitive advantages, particularly into areas where you don’t have the skills or experience or are able to readily acquire those skills and experience. Put simply: “stick to your knitting” and guard your strengths carefully.

6. Not seeking advice

Advisers are there for good reason – get a good one and it should be the beginning of a long, happy and rewarding relationship. In your business’s formative years it may be sufficient to use one key adviser, such as your accountant to guide you (and, make sure they are a good one). But bear in mind, not all accountants are well-rounded “business advisers” as such; seek professional recommendations to fish out the good advisers. And, don’t be shy to pay for good advice that goes beyond simple “compliance work” – it’s important you understand the difference. Then, as your business grows you may find that you need advice from different accountants, each with strengths, expertise and knowledge in different core business functions.

7. Not knowing your numbers

Smart business people understand “the numbers”, a.k.a. the universal language of business. Understanding the numbers empowers you to make good management decisions and to identify opportunities both internal and external to your business that can ultimately lead to profits. It’s imperative to maintain timely and complete accounts, and to understand what the numbers mean and how they relate to one another, such as the simple relationships between profit and loss on the balance sheet. This accounting data is fundamental to good management decision making; not understanding the numbers can lead to disastrous decisions being made.

Paul Gidley is a director of Shaw Gidley and has more than two decades of experience in corporate and personal insolvency and reconstruction across a broad range of industries and commercial sectors.