The key to corporate structure

While the number of corporate failures always rises during an economic downturn, the recent spate of troubled businesses being resurrected through competitor or investor buyouts demonstrates the underlying potential of UK firms, even struggling ones.

The widely quoted figure on start-up businesses is that half will cease to exist within three years, and this figure rises even higher when the period is extended to five years. But why do so many fail?

It is unrealistic to simply label the current economic climate as the bringer of doom – after all, those businesses that do not fail are trading in the same conditions. Many are thriving, posting solid year-on-year returns.

The recent buyouts of a number of high profile businesses from administration suggest that other – reversible – factors take the majority of the blame for their woes. Their near collapse masks the inherent profitability others see of the business longer term, which is being recognised by new owners seeking to restore growth and profit to the company.

These are not rare examples either – recent research has suggested that acquisitions of private companies are nearing the levels achieved before the onset of the financial crisis, indicating a resurgent willingness to restructure struggling firms so they are better placed to profit from an eventual economic recovery.

With so much activity going on, clearly other factors are at work in stifling some companies. These are factors which every business faces, and as such every business – particularly start-ups – would be wise to understand them so as not to repeat the same mistakes and suffer the same fate.

Several key factors permeate the vast majority of corporate failures. These are:

We live in a global marketplace, with often intense competition. Markets continually ebb and flow; thanks to global cyclical patterns as well as basic supply and demand conditions for instance. As such, standing still using the same routine is no longer an option. Businesses that have survived the test of time are those which keep a flexible approach to their operations.

This covers all facets of their operations. By being able to alter the avenues for expansion, adapt products or services to meet changing demand, keep abreast of relevant technological advances, maintain a positive work environment to retain skilled staff and demonstrate a willingness to change suppliers to achieve cost efficiencies, firms can stay in peak shape to meet customer demand and retain optimal trading outcomes.

Failure to manage costs
Cost-cutting is not simply a measure that should be undertaken when times are tough. A healthier, more balanced approach is to consistently strive to limit operating expenses. This ensures that revenue is not needlessly wasted during boom times, potentially enabling unavoidable cuts during difficult times to be less drastic.

Every business expense should be returning some form of benefit to the company, and maximising this value is an on-going task. Regular examination of a businesses’ overall cost base can identify new and on-going efficiencies, with the savings able to be reinvested into growth avenues or even set aside to cover any future revenue shortfall. These reviews should examine everything from stock acquisition, finance and currency transfers through to staff expenses, utilities, logistics, advertising and communications.

Poor risk mitigation
“If it ain’t broke, don’t fix it” goes the old mantra. In business, however, it is usually too little, too late to wait until something is broken before making amends.

Being proactive and treating the cracks as they are discovered makes much more sense, particularly for SMEs, given that they are more susceptible to shocks due to their smaller size, capital reserves and, quite often, tight cash flow situation.

Implementing strategies to deal with major shocks when and if they arise is the means of achieving this, and should cover all operations across the business. For instance, how would significant currency movements affect the profitability of overseas sales? Would the sudden departure of a key employee result in the loss of critical skills or knowledge? Can the company compete if a similar operator opened its doors down the road?

Lack of perspective
Being overly insular can, over time, become a serious drag on business performance. Having knowledge and skills from outside of the business, and an idea of how this particularly fits within its industry, help to provide focus, stability and relevance in the marketplace.

Larger companies generally obtain this sense of perspective through recruitment, although SMEs are often limited from bringing an outside perspective in-house due to budget constraints. However, there are plenty of specialist consultants and services available which specialise in providing assistance to SME, strengthening a business by adding an outside perspective in their area of expertise.

For instance, a credit insurer can protect a firm’s cash flow and monitor new business opportunities to determine the desirability of pursuing them; a currency specialist can reduce the risk of adverse currency movements for firms that trade abroad; and a growth management specialist can ensure that businesses experiencing rapid expansion channel their energies into sustainable expansion and avoid the risk of growth petering out.

Inadequate staffing levels
Nowhere is balance more crucial for the survival of a business than staffing. Too many staff and the cost burden can bring even a successful firm to ruin. Too few staff will likely result in falling productivity and the inability to take on new business, while leaving the company heavily exposed when an employee leaves.

As well as the cumulative number of staff, headcount needs to be balanced across the relevant areas of operation. For example, in most instances it does not make sense to have more salespeople than workers delivering the product or service, or more managers than employees to mange.

Balance is also needed between pursuing new business and meeting the needs of bread and butter customers. If staffing levels are redirected to chasing new customers at the expense of serving existing ones, key clients may leave, cutting revenue and adversely affecting the reputation of the business.

Unsustainable reach
Retailers have been a prime example of businesses over-stretching themselves in the pursuit of growth. Having expanded rapidly during the boom years, a long list of high street retailers have, since 2008, announced the closure of under-performing stores to ensure the company’s survival.

Corporate expansion should be carefully targeted towards profitable areas, particularly for smaller businesses with few or no back-up options available to them.

As a business becomes more established, it can then attempt more risky expansion options, but even then, should not take on risk so great as to threaten the company’s very survival should the strategy go awry.

Charles Purdy
As the Managing Director of Smart Currency Business, Charles has helped thousands of UK SMEs reduce the risk and improve the efficiency of their overseas trade, and leads a successful small business with 50 staff. A trained chartered accountant, he has 25 years experience in the international payments industry, and was previously the CFO of a listed company.