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I first published this article at the RiskBuster blog on September 19, 2011.
Watch out for these common business killers! Here is the second part of the series, with 4 more business killers.
Cobwebs on Accounts Receivable. Avoid extending credit to customers if you can. The problem is, in businesses for which customer credit is the industry standard, the owner gets drawn into play now pay later because all the competitors do it. The model works well for many businesses, but owners who do extend credit have to stay on top of collecting monies owed to them. A good bookkeeper will provide an aging accounts receivable report a few days after each month-end. Receivable collection is not always the most enjoyable part of owning an enterprise, but effective owners understand that cash flow is the lifeblood of the business and that a cash-starved venture has one foot in bankruptcy court. If you must extend credit, make collections a regular practice, factor the cost of an operating loan into prices, and be prepared to ditch customers that persistently make collecting difficult and costly.
Not Paying Bills. When business is going well, owner’s work long and hard; make hay while the sun shines. In a perfect world, business brings in more money than needed to pay the expenses, with a bit left over to call profit. However, the marketplace occasionally throws nasty curve balls that tilt the financial ratios the wrong way and cause businesses to lose money. Business finances are like a house of cards; weak sales or high costs can trigger a wicked chain of events resulting in unpaid bills, from trade accounts to bank loans to taxes. Once the house of cards starts to tumble, an owner has to work even harder to get back on top of the bills. A protracted financial crisis brings on burnout, disillusionment and eventual abandonment. The cure is simple, not always easy; stay on top of your bills and have a rainy day fund ready in case you need it.
Persistent Low Bidding. Any fool can go out and get a lot of work by undercutting competitors. It’s true that most businesses will occasionally slash prices to get a foot in the door with certain customers. However, low-balling is a strategy best left to those with deep pockets. Businesses with solid bookkeeping systems in place will be able to spot low-bid issues early. In the absence of a good bookkeeping system, owners are left to discover low-bid problems at the end of the year when they can’t pay their bills. The simple solution to the low-bid challenge is to increase prices high enough to produce a bit of profit; those who don’t are relegated to struggle or face the eventual penalty of insolvency.
Debt Heavy. Some entrepreneurs grumble about how difficult it can be to get funding, or that lenders are too tough. It’s true that lenders can be a bit tight-fisted, but they know the risks involved, and they know first-hand how difficult it can be to squeeze loan payments out of a dying business. Bank loans cost money and create stress on business finances; the larger the loan, the higher the cost. Smart business owners recognize that not all problems are solved with debt and continually seek ways to innovate solutions to problems without increasing debt. They also take care not to run the debt up to more than the business can comfortably repay.