by Caroline Wood
Do you want to have a thriving local food business? Then taking note of the reasons why other businesses have gone under can certainly get you ahead of the game. Learning from their mistakes is a much smarter move than learning from your own mistakes if possible.
Here in Australia, the Australian Securities and Industries Commission publishes annual statistics from reports by external administrators. The reports set out the top reasons for companies going in to administration for certain industries. One of the industries that they focus on is the food and accommodation industry.
The 2013-14 report1 has been released and is available here if you are interested in looking at the full report. But the top five reasons they list for food and accommodation companies going in to administration are:
1. Poor strategic management of business
2. Trading losses
3. Inadequate cash flow or high cash use
4. Poor financial control and lack of records
5. Poor economic conditions.
You may not be able to do much about poor economic conditions, but there are certainly actions you can take to reduce the top 4 reasons.
My tips for overcoming Poor Economic Condition problems include:
• Have a business plan. Make sure you have a business plan in place. This doesn’t have to be a long fancy document. It should be a document that sets out the direction you want to go in and how you want to get there with goals that are SMART (specific, measurable, attainable, relevant and timebound) and actions that support these goals. However, this document has no purpose if you aren’t going to measure how you are going against your goals. Don’t just write the plan, check how you are going against them and then take action if you aren’t performing as planned.
• Know your cost structure. You need to know what your products are costing you to produce so you can set your prices so you are making a profit. Not sure how to do this? Hire an accountant who knows how to help you with this. It may not be the cheapest thing you do but an accountant should be able to come up with a model that you can then update as your situation changes and you add new products.
• Get on top of your cashflow. I can’t stress enough that you have to get on top of your cash flow. You need to know when cash is coming in and when cash is going out and how you are going to pay for things. Can you cover costs through cash holdings or do you need to set up a line of credit or get a loan to help you out? Making a profit is not enough if you don’t have the cash to cover bills when they are due. You will often find you have to pay for supplies before you receive the income to cover these costs. Look at ways you can reduce this happening. Can you negotiate better terms with your suppliers so you have longer to pay? Or can you get your income in quicker? Do you have any customers who are paying late that you can chase?
• Have systems in place. One thing you don’t want is money trickling out of your business because you don’t have good financial controls and records. Fraud might immediately come to mind but it can be something much more simple than that. It could be not having processes in place for raising invoices meaning you forget to invoice someone or it could be that a check comes in and you don’t have a system for banking them so one goes missing. And of course not keeping records can get you in to a world of trouble with the taxman, clocking up debts that you just can’t pay. Depending on your skills and how comfortable you are with numbers, you can take a course on financial management for small business – you may find a free one on offer sponsored by government or hire a bookkeeper to keep you on track. Just make sure you don’t stick your head in the sand. This one can really come back and bite you.
• Take responsibility for your finances. If you do go down the route of hiring a bookkeeper it is important that you don’t completely abdicate all responsibility for financial management. The bookkeeper will record your transactions, help you meet your tax obligations and if you hire a good one, they will flag with you when they see problems arising. But you are still responsible for making decisions about the finances of your business. Take the time to look at the accounts each month and understand what they are telling you. Have you underestimated a cost? Or is a particular product proving to be more profitable than you thought it would be and you could look at increasing production of it? Do the numbers make sense – if sales of a product has gone up has the income also gone up? If the income hasn’t gone up as much as expected, is there a reason, for example you offered an introductory deal to a new supplier.
Understanding the numbers and complying with your business is so important to your success. My number one tip for any new small business owner is to not be afraid of the numbers. If you are going to be a successful small business owner you have to get down and dirty with your accounts. And they will become your best friend in running your business.
Resources:
1. Australian Securities and Investments Commission, 2014, Insolvency statistics – Series 3 External administrator reports http://asic.gov.au/regulatory-resources/find-a-document/statistics/insolvency-statistics/insolvency-statistics-series-3-external-administrator-reports/#3.2
Caroline Wood is a chartered accountant with over 15 years’ experience working with business, government and not for profits helping them manage their finances and cash flows, improve their systems and develop workable business plans. She has a love of food and prior to becoming an accountant, Caroline was a catering officer in the Royal Australia Air Force. She is now combining her love of small business and food with her business The Ingredients of Business which supports people in getting their new food business dreams off the ground. Caroline also blogs about her cooking experiences at Shrinking Single.