Why do 90% of small businesses fail?

When it comes to doing business, regardless of the entity, be it a trusted brand like Sainsbury's, a family business, or a long-time friend, it's crucial to examine their financial situation thoroughly. This isn’t just about their current business performance but also their financial history, especially that of the director or directors.

Let’s explain that a little further...

A supplier was considering offering a 30-day credit term to a manufacturing business.

After an initial credit search on the business, it looked healthy and suitable for these terms.

However, after a deeper look into the directors, they soon discovered the business had only one director who had run three similar companies previously. The director resigned in the fourth year of business in each of the previous companies, and a new director was appointed to replace him. The business then went into administration owing large sums of money.

A coincidence? Maybe. A safe business to offer these credit terms to? Not really. Whether this unusual pattern was intentional or a huge coincidence, it wasn’t worth the risk.

It's important to understand that if you're not receiving payment before providing goods or services, you're essentially offering credit terms to your customers.  This is a financial risk that must be carefully considered.

Often, in family-run small businesses, you find a lot of outstanding payments are based on trust. Business owners have long lists of names, all ‘mates’ they can vouch for, who will pay up. Business is business; if someone deliberately does not pay you for your goods or services, they’re not a true friend. A true friend would pay what they owed.

The truth is that these business relationships always start with the best intentions, but there is a risk that if something happens to that relationship, it will impact your business. It’s essential to ensure a barrier exists between you and your friend regarding business and money. Where possible, make sure someone else has the task of chasing up the payment, particularly if you are uncomfortable doing this.

By taking a professional approach to managing payments, you can often find that payments come in faster than expected. This approach not only helps ensure you receive the money you are owed but also preserves the personal relationships that are so important in business.

If you are running your own business or working for yourself, the most secure way to protect yourself financially is by taking as much of the funds upfront as you possibly can. This not only ensures your costs are covered but also puts you in the driver's seat of your financial situation. As a small business, this is critical. When we talk about “costs,” this doesn't just mean the cost of goods; it includes your time.

Taking steps like this can prevent a situation where non-payment could put you directly at risk. Businesses can survive only so many setbacks before running into financial issues that they may never recover from.

At times, you may need to accept certain terms to secure business from a larger company. In such cases, proactive negotiation for more favourable terms is crucial. Always conduct a thorough credit check to ensure the deal is in your best interest.

Every business, whether it's a one-person operation or a larger enterprise, has expenses. These could be employee costs, material costs, or service costs. It's crucial to ensure that all these expenses are covered at the very least. Ideally, aim for full payment to maintain financial stability.

It's important to maintain a professional approach in your business. Avoid making allowances for friends or family on this one, too. This will help you stay resolute and professional in your business decisions.

Every business has a mental list of companies (or people) they must pay and the order of importance—for example, the taxman, utility companies, or key suppliers critical to the business functioning.

Companies at the top of the list sit here because the consequences of not paying them on time can be severe. With the taxman, you risk serious legal issues. With utilities, there is the risk of being disconnected. Without your key suppliers, your entire business could come to a halt.

You need a credit management process to increase your chances of being paid on time. It's very important to follow this process and act accordingly, regardless of who you are dealing with. There should be no exceptions.

The best way to show you is by using an example:

Stage 1 - Your invoice is due in 30 days. On the 31st day, you haven’t received payment. You must act on it. Contact the company that owes the money immediately and ask for immediate payment.

Stage 2 -If you haven’t received payment after seven days, contact the company to warn that you will be taking recovery action.

Stage 3 - 7 days after Stage 2, you still haven’t received payment. Contact the company and warn them that you intend to take legal action.

Stage 4 - 14 days after Stage 3, you may want to proceed with legal action.

Your credit management process doesn’t have to be precisely this, but it gives you an idea of what it could look like. The key is to ensure you have a process in place and stick to it.

You’ll find that people will pay at different stages of the process, but with time, you’ll notice there is a change. You have become a priority instead of sitting at the bottom of the creditor list. Paying you is no longer an option; it is necessary in line with your credit terms.

The Real Debt Guy is a qualified financial adviser and a UK debt expert. The information in this article is considered to be true and correct at the publication date.