Survival tips for fledgling businesses including cash flow

The Australian Bureau of Statistics reports that a significant number of new businesses fail within their first 4 years of trading.

At Macks Advisory we often meet with Directors who have companies in difficulties and who have only been trading for a short period of time. Through these experiences we have observed the traits of businesses that succeed and also have observed that many of these traits are not present in the companies that have failed.

The following are my tips for survival for fledgling businesses:

1. At the commencement of any new business venture, Directors should set realistic but achievable goals and define the strategies that must be in place to achieve the goals
2. The Directors must have a real understanding about the importance of cashflow. They must understand the cash drivers of the business – that is, what is it in the business that generates cash?
3. Directors must not be fooled into thinking that sales makes cashflow, only profitable sales generates real cashflow and the company must learn to preserve its capital so that it can carry on through the set up stage of the business
4. The key to preserving capital is in maintaining gross profit. Gross profit is the cash surplus from a sale that is needed to pay the businesses overheads. If the business sells different product lines, the Directors must be aware of the gross profit in each line of product
5. Directors must steer away from the sales mentality (that is, they must generate sales growth). A growth in sales can give a company bragging rights but it is only a growth in bottom line profit that really matters

Directors must always look forward and be anticipating changes in markets and customer demands. The earlier a change is detected, the better the company will cope with the change

Macks Advisory has found that Directors of companies who can adhere to these management rules are more likely to see their companies survive into the long term than fail in the short term.

Members with queries are invited to contact Peter Macks at Macks Advisory on 08 8231 3323 or pmacks@macksadvisory.com.au.