You may have heard about the high failure rate of small businesses. Bloomberg estimates the true failure rate is as high as 80% within five year. While statistics vary the bottom line is that more businesses fail within the first two years than succeed. While the collapse may seem sudden and unavoidable in most cases there are indications of trouble well before a business shuts down for good.
Financial problems are usually the primary reason that businesses fail. Underlying issues can include rising expenses, accumulating debt that is not being paid off, trouble collecting on outstanding debt, under-capitalization and paying for services that do not produce results. Poor financial management can take a business under quickly. Every business owner needs to be keeping financial records and use those numbers to make better businesses decisions. According to Small Business Trends, only 40% of businesses are profitable. Profitability is the key component if you want to succeed and having reliable numbers is a first step. There are a numbers of accounting programs out there that are easy to use and make record keeping much easier than in the past. Once you have good numbers, it is much easier to see trends, develop a budget and create a financial plan that helps your company grow.
Improving cash flow can be a critical step towards improving profitability. If possible, change your billing strategy and get payment in advance. Consider getting retainers for large projects or agreeing up front to progress billings at certain stages in a project. For continuing work, put customers on a monthly billing plan and charge their credit cards automatically. Offer incentives for early payment or payment by check, charge late fees and interest on past due accounts and consider moving accounts to a collection agency sooner rather than later. Studies show that the probability of collecting a debt decreases rapidly every month the debt remains unpaid.
Lack of Planning
Every business needs a plan – they are not just for start-ups. If you don’t have one – now is the time to create one! If you have one – dust it off and update it! You are trying to compete in a constantly changing environment and success requires both short- and long-term planning. You need to establish measurable goals, steps to accomplish those goals, and deadlines for meeting those goals. Having a specific target in mind allows you to make better decisions, build on your successes and learn from your failures. Also, if you need additional funding to build your business, a bank may ask for a business plan and will want to see how you are meeting your goals.
Is your business bringing in new customers, do you provide services people value, are you meeting customers’ needs and do they still love what you offer? Do you stay in touch with your customers and understand trends that affect their businesses? Do you know if they want new products or features that you could offer, but aren’t currently? Asking questions and really listening to your customers answers is time well spent and you should be asking what they don’t like or would improve upon as well as what they like.
Are you dependent on one customer or do you have a large client base? Attrition happens – customers die, relocate, move to the competition and your business needs a plan to replace them. Investing in advertising may be money well spent, but your best clients probably come from referrals. Investing in client appreciation may be a better use of your money.
Businesses fail for many reasons – the ideas listed here are three key areas you should be monitoring regularly.
Contact a CPA in Golden Today!
Contact Karen Schwimmer, CPA, EA today for help with reducing taxes, improving profits and managing cash flow in your small business. You can also call Karen at 303-642-0628 or email at Karen@SchwimmerCPA.com
This information is provided for general information only and should not be construed as specific tax advice as your situation may vary.