I have done a lot of insolvency work over the years. There are many different reasons businesses go broke. Here are the 3 causes I see most often:
1. Not getting paid
No surprises here I’m sure. So if we all know the risk, why do so many business owners go out backward after not getting paid?
In my experience – it is mainly because you don’t want to offend your customers. Part of it though, is simply an aversion to paperwork.
There is a reason that your big national suppliers make you sign a 4 page credit application. I guarantee they will get paid before you do.
Smart operators give themselves the best chance of getting paid and don’t get sucked in by their customers. They get a credit application signed and make an assessment of how much credit they should risk on a customer, based on the information provided in a credit application. They make sure the directors of their smaller customers are liable to pay the bill if their company doesn’t. They know when to stop credit, when to go softly and when to go hard. At the end of the day, every time you do work on account, you bet your fee on being able to get paid. So, don’t bet the business. Never risk giving credit to someone who is not rock solid, unless you have minimised the chances of non-payment and can afford to write it off.
2. The ATO
This is not about bashing this particular organisation. I have seen many a viable business put down by the ATO. The problem usually creeps up on you. Cashflow gets tight and you miss your BAS payment. Then the super, then the tax installments. The ATO people you or your accountant deal with on the phone are helpful, until they aren’t.
Then it becomes a problem. The ATO’s expectations on payment arrangements are strict and often impractical and non-commercial. You would think that if you are running a business that is viable and employs people – they won’t put you under just because you have a bit of a cashflow problem. Think again! Once you default on that payment arrangement – even if it is completely outside your control – you have a major problem with the ATO that can get out of hand very quickly.
Smart operators don’t use the ATO to provide a line of credit until BAS time. They put aside their tax liability as it accrues. When they run into trouble, they treat the ATO as they would a bank on applying for a loan. They make sure they can honor agreed payment arrangements. If they can’t, they go straight to see a good business lawyer and act immediately on their advice. They know that when the ATO turns nasty, they are the nastiest creditor there is (at least of those who operate “within” the law).
3. Internal disputes
Wont’ happen to you? You get on with your business partner, your key employees, your spouse? Trust them completely? Always will?
If you have said yes to all of the above, you probably already know you are having yourself on.
A personal dispute in your business will inevitably take your eye off the ball. Bad blood has a habit of poisoning not just the relationship of the participants in the dispute, but also relationships with those around them. People in dispute are stressed and often lose their good judgement. This is probably the most common cause of failure of mature businesses (outside times of recession).
Smart operators know that most relationships change over time. They structure their business to ensure that it can survive the ebbs and flows of personal relationships. Just thinking through “what happens if I don’t get along with this person in the future” each time you enter into a new business relationship, is a pretty good start.
You know that when it gets really bad, you need to see a good business lawyer pronto. However, you don’t have to spend a fortune (or anything at all) to improve the resilience of your business. There are usually several contributing factors that lead to the crisis that causes the business to fail. If you do one positive thing now to avoid one of the 3 traps mentioned above, your business is just that bit more likely to survive the next crisis.