Why Small Businesses Fail

Many businesspeople are too busy servicing and supporting customers to make time to keep their financials up to date.

Small businesses that do not have proper financial management systems in place have a high risk of failure.

I am constantly amazed at the ignorance of some businesspeople. They will work 12 to 14 hours per day trying to keep their business afloat, go out of their way to assist customers, produce excellent products and provide great service, but still go insolvent.

Why? Many businesspeople are too busy servicing and supporting customers to make time to keep their financials up to date. After all, they say, it is always possible to get an extension on their tax returns - which they give to an accountant. And, they say, they don't need daily, weekly or monthly management accounts.

This is a recipe for disaster - a virtual guarantee for failure. What does a small business need to do regarding its accounts? The following are non-negotiable:

Invoices: Businesses must invoice customers in order to get paid. There are still small and medium enterprises (SMEs) that delay sending invoices to customers for weeks.

Follow up payments: A payment is only received when it is safely in the bank and cleared. Cheques can be marked 'return to drawer'. If this happens, the invoice needs to be clearly marked unpaid and payment collected again. Far too many SMEs discover too late that a cheque has bounced, or fail to reconcile it with the unpaid invoice. The owner spends long days and nights delivering the product to the customer, and then does not even realise they have not been paid.

Check the bank account: SMEs should check their bank accounts every day. Some either do not do this, or check it once a month when the statement arrives in the mail. How are you to know that a customer has paid if you do not check your bank account regularly?

How can you know if the bank has made an error, or if there has been an unauthorised withdrawal of funds if you do not check your bank account regularly? Debit orders can be duplicated.

Amateurs accepted:
  "A business owner is not expected to become a financial expert - that remains the task of his accountant."

Checking statements once a month is insufficient. It is difficult to analyse a long list of transactions across many pages of a bank statements. If it is done every day, or every week, the task becomes more manageable.

In the last days of the Health and Racquet Club, two debit orders were sent to clients' banks for the same month. Many people did not even realise they had been double-debited and proceeded to pay twice.

Make sure the supplier has been paid: At the same time, check if payment to the supplier has gone through the bank. Imagine not being able to process an order because the raw materials did not arrive. Maybe the cheque was lost in the post. Imagine having the telephone cut off because you forgot to pay the telephone account - this is quite a common occurrence.

At the same time, SMEs need to check they have not paid the same invoice twice.

I am not recommending that each SME appoint a full-time accountant or bookkeeper. However, the record-keeping/accounting task needs to be done by the owner/manager every day. This should take only five minutes a day - maybe while drinking the first cup of coffee - to handle this small but crucial task. It should come before even taking the first telephone call of the morning.

Once the basic record-keeping procedure is in place, it becomes easier to use the information to make important business decisions. Remember that accounting and financial data is not prepared only for the purposes of giving it to SARS or the accountant, but to make proper decisions about how to run the business.

Financial accounts will tell you if the company is making a profit - there is no point being in business and working so hard if you are not going to make a profit. It will tell you how and where you are spending money.

For example, businesses are often amazed to discover how much they are spending on bank charges. They don't know that it is possible to visit their bank and negotiate a discount on bank charges - but this is only possible if they know how much they are spending.

Financing: Most businesses need finance or an overdraft at some stage. When visiting the bank for an overdraft, the first item they will ask for is monthly management accounts - the same accounts you will be keeping if you have followed the previous points. If you have no accounts, you will not get the overdraft.

A business owner is not expected to become a financial expert - that remains the task of his accountant. He is expected to know enough to understand how to read a balance sheet and income statement.

Typically, many SMEs will rush to their accountant with a pile of papers and expect them to produce the required accounts. This is time-consuming and costly, and probably by the time the management accounts are produced, the SME is either bankrupt or the urgency for the overdraft has passed. If the business owner did the company's accounts, he would have the correct information at his fingertips, and not even need to rush his accountant.

In conclusion, businesses that relegate their financial record-keeping to the lowest priority are relegating their own business to the scrap heap. Whatever the level of 'busy-ness', SME owners simply have to make time to do their accounts properly. It can be done in less that five minutes per day – I guarantee it. It's not too much to ask in order to ensure the survival of your business.