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When a business collapses do you always heed the lessons?

By Elliot Harris

When business people see the increasing number of articles coming out about the collapse of businesses in the public eye, there is a temptation to think that it is solely a result of them growing too big and too fast. However, like the collapse of any business, there are always more reasons and lessons for us all to learn. The biggest of these is when to say NO!

When you first start out in business there is a temptation to take on every piece of work going because, after all, you don’t know where the next piece of work is coming from. However, as many find out the hard way, turnover isn’t everything and much more attention need to be paid to profit margins and cash flow. After all, giving someone 90 or even 120 days credit on low-profit margins when you have to pay your suppliers quicker(unless they are daft enough to give you similar terms) and pay your staff monthly or even sometimes weekly is a road to disaster.  Well, it seems that those who ran the high-profile businesses thought differently and many of their staff and supply chain are now paying the price.

We once had a thriving textile industry in the East Midlands but it disappeared over the years because manufacturers were in thrall to the major retailers who decided what they would manufacture, what stock they would hold, what margins were appropriate, and when they would get paid. So the whole supply chain was typically waiting 60-90 days to get paid when the retailers were receiving cash in return for goods when sold. The textile industry just rolled over for the sake of getting their turnover largely from one main customer and wondered why they disappeared when the retailer moved on to cheap labour overseas in due course.

Doing business is always going to involve risk and the way to stay in business is to minimise those risks. So that means that some business is just not worth having. Unless you have huge margins you cannot afford to give extended credit and why should you? Your business is not a bank. Banks do not lend money without adequate security so why do you effectively lend money to your customers on extended credit terms and without security?

So what other lessons can we learn? Here are a few:-

1) Know your client/customer. Who are your clients/customers and what risks do they run? If they have major customers what sort of exposure do they have? It doesn’t matter that their customers are big names. Who thought the likes of Carillion and British Home Stores would go under? If you want to take on a new customer, by all means do credit checks but not just based on information that is often a year out of date.

2) Stick to your credit terms. If you have to pay people monthly you need to ensure that you are being paid monthly too or increase your margins if people want more credit. Consider giving discounts for payment in 7 days if your normal terms are 30 days. People used to do that but seemingly no longer bother; however, with the right protection it can work.

3) Get your costing right. If you have, you should know when you can squeeze your margins for the right contract but there has to be a line in the sand that you DO NOT cross. If your business is good enough the customer will use you and if they go somewhere cheaper and it fails then they will come back only this time your margins will be increased and you will do business on your terms.

4) Someone will always do it cheaper. Yes, they will but not for long! The Insolvency Practioners’ files are full of busy fools who thought they could work for nothing!

5) “I have to keep my prices low because of the competition”. No, you do not. It isn’t all about price. Concentrate less on price and more on the USP of your business that makes people want to buy. If price is always the determining factor then there will always be someone who will undercut you. If lowering your price means your margins are cut to the bone then effectively you are working for nothing so why not go and work for someone who will pay you what you need?

6) Make sure your terms of trade are watertight. With goods, you can have business retention clauses although they do need to be tightly drafted it is very difficult to claw back a service. So, ensure that for a long contract, you have proper stage payments. I know some software companies are able to use their skills to ensure they get paid properly if clients abuse their trading terms but not everyone has that opportunity. The client will not hesitate to come after you if you breach your contract so make sure the same facility is open to you.

7) Make sure every client has a credit limit and stick to it. If the new order takes them over the limit make sure the old debts are settled first. Be frank with the client and let them know you have limits. When you take on a new client you often invoice them on a pro-forma basis until you are convinced of their creditworthiness so why do you not give them credit limits as your trading relationship grows?

Finally just because you are dealing with the public sector they should not be treated any differently. Your rules are your rules and whatever you agree contractually THAT is what you stick too and they should too.

There are other lessons too but if you get the lessons above right you have a better chance of succeeding in the long term.

Elliot Harris | UK Business Advisors (

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