One need only peruse the front pages of any number of news sites to see that businesses large and small still fail, even when the economy is on the uptick. The reasons for these failures almost always fall into a couple of well-understood and uncomfortably familiar categories, the most common of which is an overabundance of debt.
While over-borrowing isn’t always the reason a small business fails, debt can figure into business failure more often than most people might be willing to believe. Marvel Entertainment is by all measures one of the most successful companies in history at this point, but not even 20 years ago they were bankrupt and in pieces on the desk of a federal judge in Delaware.
There are other causes, but all of them inevitably lead to debt and bankruptcy.
Debt Instead of Sales
What small business needs are sales and cash flow. This is something that is far too often overlooked by executives and entrepreneurs alike. A business cannot survive on borrowed money for long. The recent string of distressing bankruptcies in the U.S. retail and manufacturing market should be proof enough of that fact.
Small companies must pursue sales, even when borrowing can stave off financial problems for a time. Sales will do the same thing without saddling the balance sheet with long-term payments that may or may not be serviceable with future income.
Like the saying goes “it isn’t how much you get paid, it’s when.” In almost every bankruptcy, otherwise, healthy companies get snagged by a situation where their bills are due on Monday and their income happens on Tuesday. This lack of timely cash flow destroys businesses because it makes the operation of the company impossible. Every business must have ready cash on hand to pay day-to-day expenses, including debt service. Without that cash, they are bankrupt, even if they have millions in accounts receivable.
One of the problems some companies have related to debt and cash flow is a lack of accounting competency among senior management. It’s understandable, as accounting is an unexpectedly complicated subject that requires considerable study. Since our educational system does almost nothing to address this problem, it is up to individual business owners to learn the subject on their own. Without the ability to speak the language, running a business is nigh unto impossible.
There are no guarantees in business, but preparation is one of the best ways to avoid the kinds of common problems other failed companies face. Learning to manage debt, cash flow and accounting knowledge are three important first steps.