In Australia for the July – September Quarter of 2015, there were 1,133 businesses that went bankrupt. And a further 200 became Insolvent Debtors. These are scary figures. This number wont even include the business owners who’s partners went out to work just so they can stay afloat or the ones where the business owners got a ‘second job’ just to keep the income coming in for the family.
The implications of your business going bankrupt are horrific, your family suffers, the stress and affects on your mental health are horrific. Not to mention the toll on your reputation in your local town.
This week I witnessed the ugly side of Facebook, where a local small business had gone bankrupt several months ago and the husband and wife were trying to work in their new jobs and they were tagged in a Facebook group with things like ‘don’t buy anything from this person, they are the ones who went bankrupt causing all their clients to loose their money’ and a lot of horrid other things.
This is so sad to see, I have been working with small businesses for 18 years, not to mention the 4 small businesses I was actually employed by before then. I see how small businesses struggle and how they put their clients and staff before themselves all the time. Someone who goes into business doesn’t deliberately take their clients money and not give them products or services.
But there are things that you can do to try and prevent going bankrupt. The main thing is to take control of your business. Wether you are new to business or have been operating for a long time, if you don’t have control of your business then you risk going bankrupt. But how do you take control? What should you be looking at?
Have a budget
You must have a budget; no matter how small your business is you must have a budget. But budgets are hard, as you have to predict how many sales will come through the door.
Every year I sit down and do what I call a reverse budget. I suppose being a service based industry it is a but easier for me because I can look at the last 12 months worth of expenses and nearly predict the next twelve months. The only variable would be if I employed more staff or had more clients come on board.
I work out my wages for the next 12 months (assuming I have the same amount of staff and allowing for a wage increase of 3%). Then I work out my expenses, office utilities, lease expenses, stationery, travel etc etc. Then I add those figures together and also add the amount of profit I would like to make and add that to the above figure. Once I have this figure I break it down to a weekly figure.
I know what my hourly rate is so I divide the weekly figure above by the amount of my hourly rate and the result is knowing exactly how many hours each week need to be charged out to clients.
I have written an extended blog about this previously. You can go to How Much Does it Cost to Just Open Your Doors and have a read of it here.
But once you have done your budget, or reverse budget you need to make sure it is realistic and achievable. If it isn’t then now is the time to either do something about it and make it achievable or close the doors. Look at staffing, do you need so many staff. Do you need so much stock? How can you get your sales up?
If you don’t understand it enough then ask for help. Go to your Accountant, go to your Bookkeeper, see a Business Coach, or get a Business Mentor. Just get someone to help you understand your budget and how you can improve this so you are operating above your break-even point.
Look at benchmarks for your industry
Wikipedia defines Benchmarking as the process of comparing one’s business processes and performance metrics to industry bests or best practices from other companies. Dimensions typically measured are quality, time and cost.
The Australian Tax office has benchmarks for most small business industries, so you can compare your business to other businesses in the same industry as you. All without contacting your competition and asking them straight out.
If I am working with one of my clients who are struggling financially, this is one area we go to. We look at their turnover compared to the industry average and their Cost of Goods Sold, their wage percentages and lots of other things.
This can help them identify that their staff percentages are too high or their obviously not charging enough cause their Cost of Goods Sold are a lot higher on average.
It’s a great tool to help you make decisions around several areas of your business.
I see this time and time again. Business owners are too busy working in their business to actually find the time to sit down and get their invoicing done. They only get around to it when cash flow dries up and they need to get some money in.
Then they have to offer discounts to get people to pay fast, or beg clients to pay now. Or they have clients who question the bill because they can’t remember them being there for that long or doing that work. Or clients will then decide they weren’t happy with something that was done and so refuse to pay.
You MUST find the time to invoice regularly, AT LEAST once a week. So that any issues that your clients have can be addresses straight away, so they CAN remember that you were there that long. So that your clients can advise you of something they weren’t happy with and you can sort it out straight away. So that you DON’T have to beg them to pay so your cash flow doesn’t dry up.
Control your debtors
If you have a budget that ‘works’, as in it shows you that your business is profitable and you invoice regularly then the next thing that can cause financial stress for you is that your clients don’t pay. This is a huge huge problem in the business world.
Most small business owners are softies (you may not believe this, but they are). If they ring a client and the client tells them that they can’t pay because they are struggling financially, then the business owner will say ‘that’s ok Mate, just when you have the money will be fine’. And then end up never being paid for the job/service.
You have to take control of your debtors; if they don’t pay then you can’t pay someone else. The best policy is to have a no pay no service policy. If your clients cannot pay you within your trading terms then you cannot do the work for them. This may sound tough but it is necessary, you need the money, you need the cash flow so you can pay staff, suppliers and the ATO.
Look at taking a deposit for all works worth over a certain price, or for work that requires you to purchase materials first. If they don’t pay the deposit, work can’t start.
For jobs worth thousands of dollars arrange progressive payments, a deposit, stage 1, stage 2 etc etc and then a final payment once all work is completed and they are happy with the standard.
Cost jobs correctly
A lot of small business owners (including myself) have lost money on jobs being incorrectly costed. Usually it is around the amount of hours a job will take to finish. We all tend to get the costing of materials pretty accurate, but the labour side of things fails us.
You need to make sure you have some allowance when you are doing up a quote for things to go wrong, or to just take longer than you originally thought they would. If you think something is going to take a week, then quote for a week and a half. It doesn’t matter that you may not get the job, because not getting the job would be better than losing money on it.
Don’t cut your price just to get work; this is the fastest way to go bankrupt. Do a good job, have awesome service, be of the highest standard possible and complete the job on time and on budget and this is what will keep the work coming in, no matter what you charge. If you are pricing your work low to get the job then you wont be around for long.
Remember the ATO in everything you do
You need to remember that when you pay staff, you must pay their tax and their Superannuation. When you collect money off people through sales 10% of that is GST and belongs to the ATO.
A lot of small businesses are going bankrupt because of their debt to the ATO. You need to make sure this doesn’t happen to you. I have previously written an extended blog on BAS Debt and How to Avoid it. Make sure you take the time to read it, as it is very relevant to this subject.
If you use these 6 steps in your business, you will reduce the chance of becoming bankrupt.
I also offer a Small Business Mentoring Program, if you would like for me to go over your budget or help you with making decisions around your financial situation, then you can contact me at firstname.lastname@example.org and we can set up a time for a session.