how to avoid business failure part 2 of 3

7/30/2019 How to Avoid Business Failure Part 2 of 3

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How toavoid

businessfailure

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How to avoid business failure: 02

There are three main reasons whybusinesses fail, according to accountantsand business advisors, Cooney Carey.Most failures are a result of Financial,Trading or Management issues, or

a combination of all three. If theseproblems are recognised and treatedearly, then failure is not inevitable, saysTony Carey, Managing Partner.

Cooney Carey hassignicant experience incorporate recovery andbusiness structuring. Inthe second of three linkedarticles examining theseissues, Tony draws on thisexperience. He also includessome sound advice from

senior nancial and bankingexperts, as well as thecomments of Irish businesspeople who have notonly survived the currentrecession but have emergedwith stronger businessesby following this advice.

The second article examinesthe most common tradingcauses of business failure.

tHe MostCoMMontradinGCauses ofbusinessfailure

1. Overtrading

2. Costing and Pricing

3. Market Changes

4. Commodity PriceMovements

5. Industry Failure

6. Small Customer Base

7. Inability to Sell andMarket


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Companies can be too suc-cessful in generating sales or-ders and this can result in anunsustainable cash ow posi-tion. If sales grow at a fasterrate than can be nancedfrom internally generatedcash ow and available bank

borrowings then the busi-ness quickly runs out of cash.

Overtrading occurs whencompanies pursue inappro-

priate sales growth. Marginsare cut to generate sales andsales volume increases at atime when the company doesnot have access to sufcientsources of external fundingfor the increased level ofstock, debtors and capital ex-

penditure. In growth compa-nies, sales volume is clearlya critically important factor.But when companies get intodistress, there is a renewed

focus on sales volumes, oftenat the expense of gross protmargins. This can exacer-bate cash ow problems.

Most managers who grew upin management in the last 10years would not recognise that

slow & steady growth is a betterinsurer of business survivalthan rapid expansion!Seamus Carney Ulster BankSenior Manager

01.overtradinG

It is essential to know thereal cost of producing yourproduct or service. Knowwhat price to set, when tochange this price and avoidunder-costing. This requires acombination of informationand judgement. If pricesare too low, expenses willnot be covered, if prices aretoo high sales will be lost.

Dont be tempted to chaseturnover. There are manyexamples of businessesthat have, and indeed willuse such an exercise as anexcuse not to cut costs. These

businesses have droppedprices to maintain turnover,but at lower margins whichare not sustainable.There is a need to be brave,

to not go beyond a level,and just stay in business.Then, when the low costoperators have gone bust,you will be around topick up the business at aprice that is protable.

Avoid the temptationto simply cut cost andcompromise quality, suchan action will damage thelong term viability of thebusiness and make it mostdifcult to recover customerswhen the market recovers.

Protecting your margin is key.

Consideration must be givento what discounts you canobtain from your suppliers.Excessive cost cutting willhave many ramications. For

example, does a cost cuttingdecision have a detrimentaleffect on staff morale, andin turn, on productivity?Should you cut discretionaryspend such as advertisingor is the better decision toincrease it? Consider theimpact long term as wellas in the short term.

In relation to costing andpricing, Prot is sanity,turnover is vanity. Everysale or deal should contributeto the bottom line. If yourepricing a loss-leader, how sureare you it will deliver a prot

generating sale at a later time?David Hammond AIBCommercial BankingHead of CommercialCentre - Dublin South

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CostinG andpriCinG


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03.Market

CHanGesReduction in demand orchanges in the pattern ofdemand can be importantcauses of distress. A dropin demand may be a longterm trend resulting fromchanging consumer tastes ortechnological developments.

A drop in demand mayalso be a cyclical declineresulting from the regulareconomic cycles of boom andrecession. Seasonal declinein demand is not signicantas a cause of failure exceptwhen a company is in aweak nancial position.

Demand for a particularproduct may not declinebut the way in which it isdistributed and purchasedmay change. An obviousexample here is theemergence of the internetas a distribution channel.The growth of out-of-

town shopping centresis another example.

Both product competitionand price competitionwithin a market are commoncauses of decline. Theyoften occur together andare usually compoundedby the dynamics ofindustry competition.

Companies may be slowto develop new productsbecause new productlaunches have nothistorically been successful;there may be a complacentand misguided belief withinthe company that the oldproduct is still the best on themarket; nancial resourcesto develop new productsare inadequate; there is notsufcient technical know-how within the companyto develop new productsand there may even be afundamental lack of creativeideas for new products.

Severe price competitionhas been an increasinglycommon cause of decline inmanufacturing industries inrecent years. Manufacturinghas migrated to low costcountries to maintainmargins in the face of

vigorous price competition.Industry dynamics areanother signicant source ofcompetitive market pressure.Those companies whichhave a sound market focusand sound product focus,good product differentiationand a low cost structure aregoing to perform better inthe industry than are theircompetitors. Companieswhich are not able tocompete in these areasare destined to failure.

Knowing your market is vital. Expanding into related segments orgeographies where you lack expertise can be a costly educationalprocess. Stick with sectors and segments you understand and if youexpand your business into new geographies make sure you have doneyour market analysis and second management to the new entity.Barry OConnorDirector at MERC Partners


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Examine the industries and sectors you sell into. If theyare in difculty then an over reliance on them will resultin difculties for you also. Specialisation is a good meansof marketing your business, but beware of becomingover exposed to one sector. Obvious examples in thecurrent market are the property and tourism sectors.

05.industry

failure

Beware of over reliance on asmall number of customersor products. If they go - you

go. Broaden your base ofactivities to avoid relying onone or two large customersor suppliers. The successof the business shouldnot be dependent on oneor two people outside thecontrol of the business.

A good business strategy

will seek to developnew industries and newcustomers. There are foursegments to such a salesstrategy. The easy strategyis based on selling oldproducts to old customers the more rewarding, butchallenging strategy is inselling New Products to

Old Customers and OldProducts to New Customers.

This latter strategyensures that the businessis always developing.

Old Products toOld Customers

New Products toOld Customers

Old Products toNew Customers

New Products to

New Customers

Business should be carefulof over reliance on a singlesupplier or a single customer.A business can also fail due toissues surrounding a principalsupplier if supplies are disrupted(through a dispute or insolvencyfor example) with no immediate

alternative available.Seamus Carney UlsterBank Senior Manager

06. sMall CustoMerand produCt base

Whilst not classed asOver Trading, similarproblems arise in

sectors that purchaseor sell commoditiessuch as grain or steel.Commodity pricesare items over whichmanagement has nocontrol and whichcan uctuate widely,often over a relativelyshort period of time.

As the cost ofcommodities risesa well-run salesfunction will pass thisprice onto customersand protability ismaintained. Howeverthe value of creditors,debtors and stock

can dramatically rise,and this creates anincreased need forworking capital.

A problem also existsin over stockingcommodity items asa turn in the marketprice can result insignicant stocklosses (or gains).

CoMModitypriCeMoveMents

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During boom times abusiness can survive withoutadequate selling skills. Whendemand outstrips supplypoor businesses can ourish.However that is not the caseat the moment. Good sellingskills and sales management

procedures are a necessity.

Management of thesales process involvessetting a realistic budget,allocating responsibilityfor its achievement andconcentrate monitoring onreducing the GAP betweenbudget and committed sales.

Companies in declineoften exhibit signs ofcomplacency. Nowhereis this apparent moreoften than when it comesto marketing. Commonshortcomings include alack of responsiveness to

customer enquiries and poorafter sales service, a poorlymotivated sales team, anineffective advertising spend,a lack of market research andpoor product development.

Can the business owner describethe USP of his product orservice in one sentence? If youreexplaining, youre losing.David Hammond AIBCommercial BankingHead of CommercialCentre - Dublin South

How does your businessdifferentiate itself from yourcompetitors? What is yourunique selling proposition?Do you have a strengthor a USP that is differentfrom your competitors?Denis Bergin Head of BusinessDevelopment- Bank ofIreland Business Banking

07.inability to sell

and Market

for MoreinforMation onHow we Can Helpyou, ContaCt:

Cooney CareyThe Courtyard,Carmanhall Road,Sandyford, Dublin 18,Ireland

t +353 (0)1 677 9000f +353 (0)1 677 9805e [email protected]

Cooney Carey Has produCed a projeCtiontool tHat Has beCoMe tHe Central foCus

of Clients day-to-day and strateGiCfinanCial planninG. we would bedeliGHted to Meet witH you to asCertainHow tHis tool MiGHt best Help you.

how to avoid business failure part 2 of 3

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