Just three years after it was founded, FedEx was burning close to one million dollars a month. At its most desperate, the delivery company had just $5,000 in the bank, substantially short of their $32,000 monthly fuel cost.
So what did founder Fred Smith do? He headed to Las Vegas and stuck everything the company had on red. Seriously, this happened.
Thankfully, Smith’s bet paid off and he avoided a very public bankruptcy. He won $27,000 that night, giving the company enough money to keep his fleet on the road and in the air.
What does FedEx look like 43 years later? It employs close to half a million employees and makes tens of billions of dollars.
But why am I talking about FedEx? Well, it’s definitely not to recommend Blackjack as a legitimate fundraising tactic!
The point I’m trying to make is that all businesses great and small experience tough times. What’s important is how you react and respond. If you bury your head in the sand, you might as well kiss your business goodbye.
In this blog, I’ll share four key areas that business owners tend not to think about until it’s too late! So, if you are a small business owner, please read these carefully as it could mean the difference between a business’s collapse and survival.
Don’t ignore credit control
In my experience, credit control is one of the areas that SMEs struggle with most. A lot of the time this is because the director is often the person directly dealing with clients and customers.
And if you spend a week building a relationship with a new customer, it can be a little awkward to suddenly turn around and demand they pay an overdue invoice.
I’ve seen directors ignore credit control for months until their unpaid bills became a serious problem for the long-term survival of their business. It’s utterly ridiculous that credit control ever reaches this point.
Whether you have a close relationship with your clients and customers or not, you should still expect them to pay their debts.
The easiest way round this problem of awkwardness is to separate the role of credit control. In other words, have one person for building the relationship and a different person for chasing up overdue payments.
As for the practicalities of chasing payments, the reality is that the companies who shout the loudest tend to get paid first. Ensure your credit control process involves regular, scheduled followups with clients to keep your business at the front of the queue.
This is a slightly more technical point and is important if your business is beginning to struggle or is already experiencing difficulties.
I work with a lot of struggling businesses and almost every single set of forecasts I see shows a sudden and significant improvement in trading.
The explanation for this improvement is sometimes as simple as: “We are going to try harder.”
While trying harder is admirable, it’s probably not going to do enough to actually reverse a company’s fortunes.
Going back to the sudden upswing in forecasts, I always ask my clients what they are basing the improvement on, excluding increased effort on their part. Unfortunately, there’s usually no explanation.
Prudent forecasts are always based on past data. After all, if you’ve never experienced huge sales volumes in the past, why should you expect them in the future?
Drawing up realistic forecasts will give you a much better idea of where your business will be in three, six or twelve months and will allow you to plan accordingly.
For example, if you identify a temporary funding gap three months down the line, you could arrange a business loan.
Without realistic forecasts, you’re making business decisions blind and just hoping that they play out.
Prepare for the unexpected
In the business world, things rarely run as smoothly as you’d hoped. If they did, we’d all be millionaires. Even the most settled industries can see seismic change as new regulations are introduced, political landscapes shift and funding channels dry up.
Unexpected events are just part of the game we play so you need to be prepared for them.
Unfortunately, all too often business plans and forecasts are built on the assumption that you will hit every goal and grab every opportunity. They just sort of assume that everything will work perfectly and forget to build in wiggle room.
When something does go wrong, idealist business owners suddenly find they don’t have enough available resources to adapt and survive.
When you’re designing a business plan or recovery strategy, I strongly recommend you build in wiggle room wherever you can afford it.
If things do hit the fan (and I genuinely hope that they don’t) you’ll be thankful you prepared for it.
Don’t ignore your finances
You’d be surprised at the number of directors who take their eye off their finances when their workload gets heavy.
I always think it’s a little like taking your eyes off the road when driving because you’re busy changing the radio station. It’s not a good idea.
If you are in charge of a business, you should never ignore your finances.
I strongly recommend producing a cash flow forecast and referring to it on a daily or weekly basis. Comparing your forecasts to your real cash flow allows you to quickly identify variances, analyze the cause and take any actions necessary.
Always remember that a cash flow forecast is a tremendously powerful management tool but only if you actually use it. If it’s sitting in your desk drawer, it’s as useful as a chocolate fireguard.
Barry Stewart, Insolvency Practitioner, is a chartered accountant and has specialized in corporate recovery, restructuring and personal insolvency since 1999. After leaving KPMG in 2016, Barry founded financial advice firm, 180 Advisory Solutions.