Business Failure

1
Business Failure

• Gavin Bramley

2
Business Failure

• A start-up business has only a 25 chance or
  surviving its first five years
• only a 5 change of making it past a decade.

3
Risk?

• still safer running your own business and being
  in control of your own destiny than it is being
  an employee and effectively someone elses
  leverage to creating wealth.
• I am big on using other peoples time (employees)
  and other peoples money (Banker and investors)
  to leverage your wealth but you need to be
  prudent about how you do this.

4
Reasons for Failure

• biggest reason for business failure is cited as
  being insufficient cash flow.
• In fact 50 of the businesses that failed, failed
  for this reason alone.
• Linked with this failure are
• which may also affect the business owners
  families
• business entity that the business operates in
• The link between the owners personal assets that
  may have been ceded to the creditors of the
  business.

5
Cash Flow Problem

• either your product or service is rubbish in
  which case you have a bad business proposition
  and would be better off closing down or finding
  something to sell that people do want,
• or you have bad business practices.
• Id rather have no business than bad business.
• Bad business implies that you as a business owner
  are actually paying people to take your goods and
  services off your shelves

6
Normal business behaviour?

• All businesses need money to operate so that the
  staff, leases, suppliers, bank overdrafts and
  owners can be paid.
• Where does the money come from to make these
  payments?
• from cash sales
• payments from your debtors
• in the worst case scenario, from the owner
  injecting his own fresh capital into the business
  or by borrowing working capital from a
  financial institution.
• This is what all businesses do and it is
  considered normal behaviour.

7
Million Rand Question

• Lets agree that the product or service that you
  have is in demand, so you dont have a bad
  business proposition.
• How is it possible then that you are making
  profits but have no cash flow?

8
Who took my money?

• Your monthly income and expenditure accounts
  treat the sales you make on credit (but where you
  dont receive the money for the next 30-60 days)
  as income.
• Also, any asset that you pay cash for is not
  regarded as an expense until you write off some
  depreciation (might only amount to 20 of the
  purchase price)
• money has gone missing from your bank account

9
Further

• Suppliers may be demanding you pay cash or on
  terms less favourable than you offer to your
  customers.
• Example
• Lets assume suppliers are demanding cash
  payments or R50,000 a month for goods provided
  and your sales (all on credit) are R75,000 per
  month.

• This money will arrive in 60 days time
• because they pressured you into this arrangement
  stating that they would continue to buy from your
  opposition if you did not agree.
• You are in fact extending R150.000 credit before
  you get your first R50,000 back in! You have
  become their banker and you are lending them
  money at 0 interest and probably without any
  security to back it?

Would you in your personal capacity lend money to
a complete stranger without taking some form of
security?
10
Consider

• The reason the customer came to you might be
  because his credit dried up with your opposition.
• Your opposition is refusing to supply him with
  any goods until he settles.
• He now comes to you with big orders and uses your
  money to pay off his debt before switching back
  to their product and leaving you with a debt you
  may not recover.
• This is even more likely if you extended credit
  without the proper credit formalities,
  application form, credit checks and demands for
  surety.
• Why do this?- because you were so happy to have
  enticed the customer away from your opposition!
  Big businesses fail too, so do not be conned into
  believing otherwise.
• Id rather not have the business if the customer
  refuses to sign sureties in your favour. The only
  reason he could have for refusing to sign a
  personal surety in your favour is if he knows his
  business cant pay you.

11
Consequences

• What happens when you extend credit to your
  customers on 60 days and yet you are paying your
  suppliers cash?
• If this creates a cash flow problem for you, you
  will typically pay a visit to your banker and ask
  for working capital. Only this time, you will see
  how you should have extended credit to your
  debtors.
• You will be asked to sign a surety (if you trade
  as a Close Corporation or a Limited company) and
  you will be expected to put up your house,
  personal savings, insurance policies and anything
  else you have of value to secure the bank loan.

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You are standing in your debtors shoes

• If your debtor goes under and cannot pay you, and
  as a result you cannot pay the bank (bank
  overdrafts are repayable on demand), the bank is
  going to sell off your assets to recover their
  money (on a fire-sale basis).
• You would be lucky if the bank gets you 10 of
  their real value, because they still hold your
  personal surety and will come after you for
  whatever else you have
• Your furniture, your personal effects, and those
  of your family if you cannot prove that theyre
  NOT your assets.
• You could loose everything, your business, your
  personal assets and your good reputation and self
  esteem.

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A third Mistake solution

• trading in the incorrect structure.
• The correct business structure is also a solution
  to the problems discussed.
• As an SME you must separate your business life
  from your personal life.
• do not trade as a sole proprietor or as a partner
  in a partnership when risk is involved in your
  business transactions,
• rather trade as a CC, a (Pty) Ltd or as a Trading
  trust as these entities will limit your personal
  liabilities.
• buy your assets in your personal name and lease
  or rent these to your business. Banks lend money
  far easier to individuals and at better interest
  rates than they do to businesses. Further, you
  will not be asked to sign perpetual sureties that
  hand control over to a liquidator if your
  business fails.

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More Solutions

• If you extend credit
• extend it on the same terms and conditions that a
  bank would do so with interest applying if the
  debtor fails to pay within the agreed time
  period.
• To improve your cash flow
• ensure you are receiving enough time to pay your
  suppliers
• if you need to raise cash for your business
  operations
• shorten the time that you allow your debtors to
  pay off their accounts and arrange with your
  suppliers to extend the time period that you are
  expected to pay.

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Dont sign sureties

• Using the previous example this action could
  bring into your business R150,000 before you have
  to pay out R50,000. This improves your cash flow
  position by R100,000 and alleviate the necessity
  for you to sign your life away for that overdraft
  facility.
• Rather let your creditors sign their personal
  assets away.

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Final thoughts

• Buy a business as Unique Wealth 2005 (Pty) Ltd
• Previous owners surety
• Open an account with another bank
• If they dont offer ask for a small loan.
• Deposit and repay timeously.
• Use credit cards if necessary
• Raising fees, securities.