Why Small Businesses Don’t Make It: An Accountant’s Perspective
In today’s fast-paced commercial environment, businesses can no longer rely on historical analysis when planning a business. Business success is predicated upon objective day-to-day analysis.
Half the businesses that exist today weren’t even thought of five years ago.
There’s no point in developing a business plan, factoring in last year’s scenarios, when the dynamics can change in a week.
As a chartered accountant dealing with businesses from small to listed entities for over 20 years I started to notice that there are three major areas hindering business growth for small to medium-sized enterprises (SMEs); emotional decision making, lack of attention to detail and a business as-a-hobby mentality.
Emotional decision making. Emotional pricing often sees owners base their prices and services structures on gut-feel with minimal evidence, fingers crossed, without considering where they sit in the marketplace. Objectivity rarely comes into the equation.
Lack of attention to detail. Business owners need to sweat the small stuff. The minutiae of working out the hours and variables required to meet success criteria, such as calculating the benefit of what adding five trading-hours each week and what it could mean to the business, is paramount. A coffee shop has to understand how many coffees it will need to sell to be profitable, how the weather affects those sales and the influence factors of locality dynamics.
Business as-a-hobby mentality. This approach means the owner is just not treating the business as a business. Instead of standing back and seeing the business as an entity that must perform for profit, the shop, office or factory is run on bravado or lifestyle. Friends and family are roped in, recruiting and training is poor and compliance is negligible.
Before opening their doors, business owners must factor in their biggest cost—the rent guarantee. Often they don’t realise this requires a commitment of several years. Coupled with equipment and fit out, it’s easy to spend big upfront without factoring in removal and make-good clauses and the liability of the lease whether the business flies or fails.
The danger is new starters will often wing it with a cursory internet search to suffice as competitor analysis of marketing or pricing points, without fully realising big companies can afford loss—leaders, years without profit or have other strategies to support their losses.
Every small business can access a cashflow dashboard to flags the potential for problems before it’s too late.
A dashboard can’t physically stop an owner from buying an imported designer desk but it will flag how many extra sales are needed or what has to be cut from the marketing or hiring budget to pay for it.
If profits aren’t stacking up, real-time numbers will compel the business owner to delve further into alternatives be that developing a niche or finding a different route.
For example, one business owner realised that it would be best to sell his online underwear business while we he was still ahead. Aware of a new online competitor opening every few months and the threat of Amazon coming into his space, there was no hope of survival. As there is little loyalty in the digital marketplace, he was able to determine what he would have to spend up on business development and even if he did invest that budget he was never going to make a decent profit.
Most small businesses are overwhelmed with the abstract edicts of competitor analysis, integrated digital strategies and market positioning. Endeavouring to predict threats, opportunities and weaknesses is futile, just as hiring big-end-of-town specialists is beyond the average SME budget.
There’s no need for an accountant to tell you what the graphs highlight. It is often just small changes that are the difference between flying, flailing or failing.
David Henderson had has baptism into accountancy working for a global accountancy firm, at the same time working in his family’s small accountancy business. He is a chartered accountant and the CEO of ROCG Australasia; marrying the benefits of a global player and making those insights accessible to the small end of town have been a constant theme in his professional life. David has seen the good and bad in the business world. He’s seen some amazing successes too; ordinary people who didn’t think they could possibly make it to the next financial year end, who’ve built fantastic businesses.
That’s why he developed CashMaxForecaster.com the online tool that helps plan, set strategies and manage budgets. Visit www.cashmaxforecaster.com for your free trial.