Businesses Die through Financial Mismanagement
We’ve travelled a long way, exploring why businesses fail and this 15th is enough doom and gloom! We can be certain many businesses will discover new reasons for failure. I’ve left the most severe and possibly most common to last – financial mismanagement.
Financial Mismanagement is not about poor sales. I’ve dealt with that in previous posts. Mismanagement is about what you do with money, once you have it.
Here are three issues – there are more – be alert to them by getting an accountant to help manage finances. Indeed the usual warning applies, get professional advice. Don’t rely on this blog post or any other!
Debt
Manage your debts. There are two types, unplanned and planned.
With unplanned debt, your outgoings exceed income and you have no reserves. With an unsustainable business it is illegal to trade without reserves. Can you reduce costs, increase sales or take out a loan? The last option is advisable only where you see a way out of the problem because the loan adds to outgoings.
Planned debt is where you borrow on the strength of a business plan. This is a better way to manage a debt, not a last minute panic. However, planned debt is still debt, so take this route with a strong business plan and an accountant to guide you.
Cash Flow
This is similar to debt when your costs are greater than income. If you are cushioned by reserves, it is good but what happens if you inadvertently cross zero?
You need financial information to see ahead and predict times when your financial situation is squeezed. If you see a problem coming up, you can do something about it in advance.
If your business is complex, you need management accounts and your accountant should prepare them and advise you of steps to be taken. However, some accountants are compliance accountants, who focus on historic records and don’t make projections. Management accounts focus on the future for your benefit, compliance accounts focus on the past for the benefit of others.
Compliance accounting is important and benefits your business too. It is about accountability and shows the world you have a record of being solvent and can account for income and expenditure.
Compliance
Compliance can threaten your business. It is where you must meet a standard imposed from outside your business. You can be fined substantial amounts or put out of business for wilful or accidental failure to comply.
There are four main sources of compliance. The first two are voluntary, if you join in you must comply to get the benefits. The third applies to all businesses. The fourth is compulsory under certain conditions and woe betide if you meet those conditions and fail to comply. They are in order of increasing severity.
Charity Commission
Few businesses have charitable status. Most that do are social enterprises and some charities trade and so have a lot in common with businesses. You comply by filing annual accounts. Specific regulations apply to charities and independent examination of accounts before they are filed should cover that.
Companies House
If you are a company, you must do a bit more. Annual accounts must be filed, along with annual returns, information about who controls the company.
The annual accounts are subjected to independent examination. This does not have to be a full audit, if your turnover is low. The difference between an examination and an audit is the auditor is insured. If they make a mistake, this means compensation is available.
Inland Revenue
Fill in tax returns yourself or with assistance from your accountant. If you make a mistake with the first two sources of complience, you pay a fine. You also pay a fine if you make mistakes with the Inland Revenue. The rules are complex and so an accountant is your best option if your business is any significant size.
Customs and Excise
This one sinks businesses. If turnover exceeds a certain amount, you must charge VAT. Failure to do so will sink your business. This is the most dangerous source of compliance, if only because it is easy to be caught out. The threshold is fairly high and so many businesses do well without crossing it. But as you approach it, your accountant should point out when it is time to register.
That’s it! 15 ways to fail. Take your pick! The truth is though, many businesses do well because it’s not too difficult to take precautions and avoid obvious pitfalls. I’ll deal with one final issue that’s worth noting next week.