Advice:Avoiding failure

By , published on 18th April 2011

The recession is in full swing; recently, two of my friends’ businesses have gone under, despite having healthy order books.

In both cases, the final coup de grace was delivered by their banks, which withdrew further credit. To a former salesperson, a company going into receivership despite having a good sales pipeline is a paradox, so for enlightenment I sought the advice of Guy Rigby, who heads up the entrepreneur group at accountants Smith & Williamson.

Guy points out that withdrawal of credit is a characteristic of a recession. Good economic conditions can paper over the cracks in weak businesses, but when credit becomes tight this no longer becomes possible. The key is to catch the real root causes of the business’s problems before they become terminal.

For companies that are turning over more than £1 million, Smith & Williamson offers a free two-hour business ‘Road Test’. They review 20 key areas of the business, highlight any where there are weaknesses and suggest solutions.

They first examine the strategy and business model; too often they find that companies are essentially pushing water uphill. They may be generating revenue from existing customers, but this may have declined over time, or even represent unprofitable business.

Failure to take necessary action in good time is the hallmark of weak or ineffective management. It may be time to refresh the talent at the top. While Smith & Williamson do not advocate changing entire management teams after a short series of poor results, they point out that complacency combined with an inability to act decisively under pressure are major factors in companies’ failure.

The whole organisation may need to be reviewed if the company is over-staffed and poorly managed. But getting rid of underperforming or irrelevant people is not easy. It needs to be done fast: in the current climate people will be fearful for their jobs, and random discussion about this will reduce productivity even further. But it also needs to be done right: if the best performing people think the axe is being wielded irrationally, they will start looking for a fairer employer.

Guy stresses that the challenges in a company are not just internal. Some of your customers may be difficult and unprofitable; their business terms should be re-negotiated or even politely terminated if no agreement can be found.

This process can be unpleasant, especially if you have to say goodbye to some longstanding clients, but it is often cathartic. It is common for companies that go through this process to see a dip in turnover for the next year but to benefit from a significant increase in profits.

Another area of focus centres on the company’s suppliers, who may have become unreliable or unprofitable. Again, this may involve people and companies you have dealt with for years and involve some personal embarrassment for the founders of the company, but your relationship with your suppliers should always be based on good business sense, not sentiment.

Sadly, the Smith & Williamson ‘Road Test Your Business’ offer came too late for my friends. My advice for them is to take a long holiday to repair and renew their relationship with their families, and then take President Obama’s advice to “pick yourself up, dust yourself off and start all over again”.

They should contact their immediate network of people, especially those with whom they have a high level of trust and respect, and identify a business opportunity that can generate cash quickly. With any luck they will soon be knocking on the doors of a bank again.

When they do, they might decide to look for a quite different type of bank. The incumbents in the banking market know they have to behave differently in the future, and some enterprising entrepreneurs I know are even thinking of starting their own. They are sure they can find customers, and they tell me that the mechanics of a bank that only takes deposits and makes loans are fairly straightforward.

Their only challenge is attracting the initial funding, so if you happen to have half a billion pounds lying about and want to help the UK’s best cash-generating entrepreneurs, please let me know.

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Mike Southon

About Mike Southon

Mike Southon is a Financial Times columnist, entrepreneur mentor, professional speaker and co-author of 'The Beermat Entrepreneur'. Mike's new book is: 'This is How Yoodoo It' - Sixty FT columns on entrepreneurship

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