I am sick of watching the various reasons small businesses fail. In many small towns we see dreams crushed over poor financial decisions. I know accounting is not the sexiest thing however it can really hold a small business owner back.
The goal of this blog is to give small business owners and entrepreneurs the information they need to survive. There are numerous reasons small businesses fail but I want to highlight the causes that relate to accounting and finance. I will leave the marketing aspects alone since many other small business blogs are crushing that niche.
Five Reasons Small Businesses Fail
1. Poor Accounting
Financial intelligence is essential. Accounting is one of those subjects where if you don’t love it then you hate everything about it. The problem with this stance is that if you put garbage data into the accounting system you will get garbage financial figures. Too many small business owners either have incorrect financial data or nothing at all. Don’t run your business blind.
In addition, there is an assumption that if you hire an accounting firm to complete taxes that the firm will also square away the business operations. Most accounting firms see this engagement only in terms of taxes. As a result they may not pay attention to facts that indicate looming bankruptcy.
To help solve this issue, generate monthly Profit & Loss and Balance Sheet statements so you can work ON your business not just IN the business. On this blog we will dive deep to try and simplify concepts to facilitate your understanding of accounting principles.
2. Cash Flow
Cash is King. A small business must have enough cash in the bank to ensure survival. In other words, cash is a reality check and what keeps a company alive. Let’s simplify this even more by saying that the business must bring in more than it spends. Sounds simple right?
So why do many new businesses and startups feel that it is ok to have negative cash flow for the initial periods of operations? This attitude leads to either the movement towards debt or the attitude of waiting on a buy-out. However, this blog is concerned about helping businesses grow and survive organically. We will explore the reasons for poor cash flow and solutions to help your business overcome cash flow difficulties.
Debt can be evil. In addition, debt is often the result of cash flow issues. Small business owners almost always have a blinding love for their passion. Unfortunately, this sometimes leads them to taking unacceptable risks. One of the biggest reasons small businesses fail is that often the amount of debt that one will take on to keep a business going defies rational thinking. The debt risk ranges from maxing out credit cards, opening lines of credit, or mortgaging their own home.
The high cost of debt borrowing makes it more costly and difficult for a company to continue to operate. The repayment of debt is a mandatory cash outflow however dividends to the owner are paid in discretion. Owner distributions only happen if the company has excess cash not needed for expansion, maintenance, or repayment of debt. As a result, it is our opinion that you should grow your company through operations. The goal should be to steer clear from growth through debt.
Death and Taxes, Right? When it comes to taxes some small business owners take the head in the sand approach. Try not paying taxes, especially payroll taxes, and see how long the IRS allows you to stay in business. Proper tax planning is critical. Ignore it at your own peril. With that said we want to help you not be terrified of taxes.
5. Operational Efficiencies
Be a professional. Another one of the reasons small businesses fail is that owners mistake their business for a hobby. Many times we have the impression that if there is a passion for something then we should convert it into a business. If you are truly going to create a sustainable business then run the business like a professional and pay attention. The goal should be to work on the business not in the business. You don’t need just another job.
Operational efficiency is a huge aspect of running a business. This can include revenue generation, cost control, outsourcing, and seeking outside advice. Basically, you can’t do everything yourself so you must find ways to be efficient. We will attempt to help your business understand resourceful ways to be awesome.
What are other reasons small businesses fail with accounting or finance?