Analyse The Cash Flow Problems A Business Might Experience How to Fail in Business

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How to Fail in Business

Millions of people from all walks of life have considered starting their own business. Millions of people have actually done it. Millions of people are still in business today.

It is sad but true that many businesses fall by the wayside at the very beginning of this venture. Yet, some make it through and prosper. Most business people don’t just open a business without a big thought. Clearly, overcoming those entry-level barriers requires more than careful thought.

There are many factors that contribute to business longevity, and each factor has characteristics specific to the type of business and the people who run it. In contrast, most businesses fail for only a handful of reasons. Therefore, learning how to fail is a harbinger of danger.

Cash flow and planning

Cash flow is the main cause of business failure. Before discussing cash flow we need to understand what it is. Cash flow is the balance of incoming and outgoing cash flows. By cash, we mean hard cash – money in your bank. Cashflow is not a measure of how much you owe your customers for work undertaken or how much you owe your suppliers and other creditors. However, these are essential aspects of cash flow forecasting.

When cash runs out, simply put, the business can’t do what it needs to do to keep going. It cannot, for example, pay suppliers, wages, loans, bills, etc. It is therefore essential to estimate the likely cash flow in the business to determine any potential problems that may arise. Could the business be facing a large supplier payment next month, potentially leaving money for other essentials? If so, what needs to be done to overcome this problem? This is not rocket science and does not require an accountant or book-keeper to provide the answers. It is no more difficult than planning the workload. In fact, business owners should first look at planned workloads.

A retail business needs to have an estimate of their daily sales and their expected profit percentage. Gross profit, without the mess of mark-ups, is expected to be 40%. This means that selling price, stock, delivery and the like, will account for the remaining 60%. To take £1000, the selling price would be in the order of £600. This leaves just £400 for all other expenses such as rent, wages, bills, rates, insurance etc. This type of business usually requires the purchase or acquisition of stock before it can be sold, as well as the cost of premises, fixtures and perhaps transportation.

Service providers need to estimate the services to be provided and the potential costs associated with doing so. This type of business doesn’t require buying a lot of inventory up front, but there are likely to be costs for tools, premises, and transportation. Therefore, a certain level of revenue has to be earned to cover the fixed costs. In undertaking the work, further expenditure will be incurred to purchase the raw materials required to perform the work.

For any business type, the expected income and outgoings must be profiled over a period of at least one month, definitely in the first year. At the end of each month the actual cashflow must be calculated against the forecast. This will enable timely adjustments to ongoing forecasts. After the first year, it will be possible to plan in quarter-years.

The art of doing this is known as business planning and creates a business plan document. Many people consider themselves unfit to create a business plan and therefore rely on professional services for them. By doing so, people risk being alienated from their own business.

Business plans don’t have to be sexy, unless the business is selling underwear and the like.

Seriously, the only person people in business need to fully impress is themselves. Ultimately, it is the business owner who is ultimately committed. Banks may want to look at a business plan, but most won’t bother to read it cover to cover. Banks are interested in potential cashflow. Sure, they’ll ask questions about the desired profession, but they’ll ask the person in front of them. They don’t look to the business plan for the answer. So, a business plan is an owner’s tool.

A business plan is simply a document that brings all the ideas and plans a business owner should already know into one document, including a cashflow forecast. The plan will determine the type of business, demographic data with respect to potential customers, potential customers and competition, government policy and economic issues, external influences such as environment, transportation, capital and the like. For new starters it will show the potential hurdles the business will face in the early stages and how the business will overcome them. This act should not be outsourced to anyone else. It is through the planning process that a business owner clearly understands his business. In turn, this planning process predicts cash flows. This is where we put a price on things planned. A business plan and cash flow forecast must go hand in hand.

Business plans and cash flow projections should not be set aside after the business has started or implemented expansion plans or other major changes. As time progresses, what was predicted and speculated in the business plan becomes a known reality. These emerging facts can dramatically change plans and cash flow projections. Many people keep this information in their heads because they live and breathe the content every day during their business. For example, if a major competitor closes, they don’t bother to rewrite the section of their plan that identifies that competitor. If a business plan is to be read, revisit at least every six months. The act of doing so may lead to new ideas based on newly discovered knowledge. It provides objectivity and something by which the success of the business can be measured.

So, to answer the question, in order for the business to fail, owners should not bother with business planning. They must be out of context with their profession and the environment in which it exists. They should know a little about their customers and suppliers, and more importantly, their competition. Owners have little idea of ​​how much revenue is likely to be generated and what the costs will be. Because of this, owners cannot predict future income and expenses. They will be constantly bombarded with unplanned events and related expenses until the money in their banks dries up. This will prevent them from pursuing their dreams and aspirations and instead lead to depression and stress-related illnesses.

That’s it! There can be all kinds of other reasons why businesses fail, but most people come back to good old cash flow problems with lack of business planning. Many business people, especially now, are suffering the effects of the economic downturn. Business planning and cashflow forecasting are key tools, not just for survival, but for sustainable competitive advantage.

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