Failing To Plan Is Often A Plan To Fail

To ensure the survival and prosperity of a business, owners and the managers they employ need to address the issues of proper and effective planning, management and marketing.

These management tools, when combined with effective information systems, mean that businesses are better placed to promptly address any unfavourable trading activities that result in poor financial results, or take benefit of a favourable economic environment.

If businesses do not possess the skills, or experience to deal with these issues, or lack the expertise to develop the necessary remedial or restructuring strategies, then external assistance should be sought.

The cause of failure of most businesses can be generally attributed to management's failure to acknowledge and manage both financial and general operational matters of concern in a timely manner. They have not responded in a manner that enables realistic and practical strategies to be implemented.

Those running businesses should positively address financial and general indicators of concern such as those shown in the following lists.

A business does not operate in a static economy. Its management must have measures in place that will alert managers to any changes in the markets where their business competes.

Management must also set objectives, develop a plan to achieve these objectives and ultimately, guide its business to success.

No matter how good a product is - how price competitive it is, or how well it sells - without good planning and competent management a business is destined for failure over time.

Financial indicators

Sales

A sustained trend of declining sales may result from:

• Loss of product quality
  
• Loss of major customer or customers
  
• Product or service needing review
  
• Uncompetitive or inappropriate pricing
  
• Erosion of market share caused by failure to acknowledge new competitors or more aggressive competition from existing competitors

Cash receipts

A declining level of cash receipts may indicate problems in areas such as:

• Debtors not paying accounts on time, or disputing debts due to faulty work
  
• Product or service is questionable
  
• Customers in financial difficulties

Debtors

In any business that relies primarily on credit sales, the level and age of debtors is extremely important.

Some early indicators of financial concern are:

• Increase in the average age of debtors, indicating ineffective debt collection procedures
  
• Decreasing receipts from debtors resulting from poor credit policy
  
• A sharp increase in debtors, resulting in a lock up of working capital
  
• Significant amounts of write offs of outstanding debtor accounts
  
• Offering discounts to collect debts earlier, resulting in the erosion of profit margins

Creditors

A review of the creditors of a business is also useful in determining financial concern.

• Increase in the average age of creditors, that is, normal trading terms are being extended over 60 days or industry norms
  
• Creditors are insisting upon "cash on delivery" for future supplies
  
• The bank overdraft facility has been consistently exceeded
  
• Creditors are instituting legal action for amounts outstanding
  
• Non-payment of statutory creditors such as PAYG and GST

Stock

When assessing stock and stock levels, it is important to consider:

• Level of slow moving or obsolete stock
  
• Inventory control system
  
• Inventory turnover
  
• Costs of holding high levels of stock

A combination of these factors over a period would indicate that a business is experiencing financial difficulties.

Often proprietors seek to inject their own funds, or obtain passive funding, to cover up financial problems, without addressing the fundamental causes.

General indicators

General indicators of matters of concern to management that should be addressed include:

Inefficient trading activities

• Ordering and maintaining higher than required stock levels
  
• Continually sourcing and changing suppliers
  
• Poorly organised factory floor

Management

• Lack of a business plan
  
• No formal organisational structure or job descriptions for all levels
  
• Lack of adequate segregation of duties
  
• No matching of staff skills and experience to prescribed duties
  
• Lack of formal management information systems, including no comparison of budgeted cash flows and earnings with actual results
  
• High staff turnover

Financial control

• No formal budgetary procedures in place
  
• Cheques issued in advance
  
• Issue of cheques which bounce, or are regularly sent back to present again
  
• Payment arrangements agreed to with suppliers
  
• Bank overdraft level consistently exceeded
  
• Non payment of statutory charges such as GST, PAYG, Payroll Tax, Employee Superannuation Entitlements and WorkCover premiums
  
• Continual injection of capital to meet cash flow shortfalls
  
• Increased external borrowing to meet cash flow shortfalls

Clyde White, HLB Mann Judd. Clyde White is a partner with accountants and business and financial advisers HLB Mann Judd Melbourne. Email: cwhite@hlbvic.com.au
First published: 8 September 2005.
Last updated: 26 October 2005.