The length and severity of the recession has created a short term, survival of the fittest mentality, aggravated by a reluctance on the behalf of banks, boardrooms and business advisers to take a gamble on new ideas or look for ways to grow. Unfortunately, in some cases, this negative culture has extended to accountancy practices who may be so focused on balancing the books that they fail to act proactively on your behalf.
If you ask the question ‘why do businesses fail?’ many people will attribute the blame to problems with cash flow. But is this the true root cause – or a difficulty that businesses experience on their way to failing? As an accountant, it’s true to say that many of the struggling businesses that I have encountered have experienced cash flow issues, but these have usually been caused by other existing factors which were problematic in their business.
Why do businesses fail?
So, to identify the reasons why businesses struggle or ultimately fail, we have to go further back and analyse things more deeply. There may be certain things which went wrong or which were never right. For example, prices were set incorrectly, key contracts were lost, costs increased, sales and marketing wasn’t strong enough or maybe there were serious staffing issues.
However, whilst these are all significant problems, they still don’t get to the crux of why businesses fail.
The real reason is the management of a business and its failure to adapt or respond to whatever problems it is experiencing. In more serious cases, they may be unaware that there is a problem in the first place – until it is too late. Your accountant should play an intrinsic role in identifying any potential issues, as well as suggesting possible solutions.
The role of your accountant
An accountant isn’t just an add-on extra who crunches the numbers – they should form a key part of a company’s management, from creating a tax efficient company structure to identifying problems and monitoring profit and loss so any potential cash flow issues can be managed proactively. Much more than a trouble shooter, they should know your business and bring a fresh eye to its needs, suggesting areas for development, possible revenue streams and advising on issues such as minimising tax liability and research and development.
A simple formula
Being a numbers person, I’m a great fan of simplicity and often apply the following equation to my clients to help them both manage and grow their businesses.
E + R = O
E is event: something that has happened and cannot be changed as it is in the past. R is the response and O is the outcome. The variable factor in this equation is R; E is fixed whilst O depends on what the response is.
If we apply this in the context of the possible business problems I mentioned earlier, we see how the response influences the outcome.
Prices weren’t right (the event). If the company’s accounting information system is good it should identify that profitability is insufficient; this may be because prices are too low to earn enough or too high and sales volumes have dropped. If management are made aware of the problem early enough, they can implement change (response), experimenting with different pricing policies for example, to find the right balance.
The SME issue
Identifying potential problems can be difficult for SMEs who may have very small management teams, lacking suitably qualified professionals to confide in who understand their business well enough to help. Due to pressures of time and money, many business owners are guilty of ‘working in’ their business rather than ‘on it’, which is why a good accountant is so fundamental to the success of SMEs, acting as a business mentor to help focus on the key issues.
Your accountant should be proactive, ultimately adding value to your business. They may not be experts in your specific market, but they should be able to help you with benchmarking so you are operating competitively with other organisations in your sector. With experience of many different kinds of businesses, a good practice will also have insight into a whole range of problems that companies experience – and how to avoid them.
Communication is key: it’s not enough to go through the figures annually when it may be too late to address problems that have become entrenched over the past 12 months. I encourage clients to hold monthly or quarterly meetings to discuss the business. This could be based on the SWOT method where strengths, weaknesses, opportunities and threats are identified. Involve your accountant and aim to come out of every meeting with two tasks – one to strengthen a weakness, and one to build on an opportunity. If you act on these, and the advice that a proactive accountant can offer, your business will go from strength to strength.
[box]Carl Elsby is MD of Midlands based [ilink url=”http://www.elsbyandco.co.uk”]chartered accountants Elsby & Co[/ilink] who specialise in working with SMEs, start-ups and family businesses.[/box]