How To Kill A Business…Quickly!

[Stanbic IBTC team]

One factor that differentiates one successful business from another is the ability to mitigate and exploit the effect of taxes and market information.

Several factors affect the survival of a business no matter how big or small. Some of these are within the control of the managers of the business and the others aren’t. Let us explore some of them:

Not separating the business from the owner/managers - Most small businesses in Nigeria are owned by one person and as a result they are run without a formal structure. They often have no way of separating personal cash from cash meant for the day to day running of their business.

Sometimes, they use the cash generated from one business to fund another and may end up killing the original business. By running the business as a one man show, employees if any, are hardly carried along and merely see the business as a means to survive rather than as a venture that they can help grow.

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Don’t have a positive cash flow –Without cash, your business will simply fail and it doesn’t matter how many assets you have. But what if there is an immediate need to source money at a time when lending is tight and asset prices have depreciated?

As a small business, you must always keep adequate cash reserves. One way to know how much cash you need is to do a cash flow analysis of your previous month’s transaction. If you spend N2million monthly on running your business then it is advisable to always have N4million as cash at the end of every month

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Be in too much debt - Businesses without cash usually resort to borrowing. Small business loans mostly come in the form of overdrafts and are used to fund running costs with the expectations that revenues will repay the debt. However, if the money is diverted into other uses, that may hurt the business. In fact some who utilize loans for the right purpose end up finding it tough to pay back not to talk of those who use it for other unproductive means.

A company with too much debt will have to repay the debt eventually and without finding other sources of repaying the debt, the creditors may have to liquidate the company.

Have too many creditors – “No credit today, come tomorrow” is a common sign post you find at the door of most small businesses. Granting credit to customers is a common business tactic provided it is properly measured and for the right business model. Some businesses are better suited for credit models whilst some aren’t, at all.

Put square pegs in round holes – Employees are one of the most important assets of a business. The more skilled and qualified your employees are, the more likely you are to succeed. Small businesses should endeavor to recruit the best possible employees they can.

Have high fixed costs – Businesses that incur high fixed costs are more likely to fail than those with higher variable cost and lower fixed cost. Imagine having a shop at a mall where you have to pay a yearly rent of N12million. That means your business must be able to generate cash revenues of N12million annually just to be able to pay rent. That can be onerous considering that you still have to spend money on marketing, salaries, purchase of goods and services, taxes etc.

Overestimate the market – Many go into businesses with or without a proper business plan. However, having a business plan does not guarantee that a business will be a success. A major reason for this is making very optimistic assumptions about the market without putting a backup plan should estimates fail. There is hardly a reprieve for businesses that overestimate the market. They fail quickly. For a simple guide to writing a business plan, read this http://bit.ly/18RnECP

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Do you have any more useful tips? Share with a comment below or reach out to us with any feedback on Twitter: @StanbicIBTC or Facebook: fb.com/StanbicIBTC _____________________________________________________________________
This post was written by Ugodre Obi-Chukwu, a chartered accountant and Founder of Resourcedat, Nigeria’s first online document and data sharing website. He asks intuitive questions to try to demystify popular norms that affect the way people live, think and spend money.