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T'is the season SMBs may close their doors

03 Dec 2018

The next few months (December-February) could be tough enough for some SMBs to pull the plug, but knowing when to quit could actually be a good thing.

That’s according to Auckland-based chartered accounting firm NexGen Group, which points out that almost half of New Zealand’s SMBs and startups will fail within their first two years… something that’s exacerbated when business owners refuse to give up.

NexGen Group says that cashflow stress and fewer customers leads to more time to analyse the business. That’s when many business owners come to a decision.

“Knowing when to quit, before things get too out of hand, is actually a good thing,” explains firm director, Peter Prema.  “It means you may be able to minimise damage enough to come back another day and try again, older and wiser."

“Unfortunately, in our experience, too many small businesses will be looking to take out an overdraft or borrow against their mortgage to try and keep a sinking ship afloat when really they should be closing up shop.”

Prema points out that when businesses borrow to help pay bills such as salaries and rent, that’s a sign that things aren’t quite right with the business.

Prema says that the bank account is the heart of a business. If it’s not healthy, then the business isn’t healthy either.

Other areas of trouble include due dates on provisional tax, GST and ACC levies, all of which span December and January. NexGen Group says it’s poor timing on the part of the government, because it knows it’s when most business activity grinds to a halt.

“Christmas presents for the family, summer holidays and taxes are part of the story, but another killer is that customers delay payment on invoices, often to try and save their own cash flow, but there’s a massive knock-on effect,” says Prema.

“The second year in business is also when the tax free run ends and suddenly you have to pay the previous year’s tax and the provisional tax for the new financial year. Anecdotally, relationship break-ups can also sink a business.”

But it’s not just money that can be a sign. Owners who are bored of the ‘same old’ business can see it as just a job. That leads to other areas of the business to suffer. Customer service levels drop, complaints increase, staff turnover is high, and businesses can’t keep up with new technology.

“It’s important not to quit until you take expert advice, but you should ask yourself some questions to help be honest with yourself. For example, how is your health? What are your stress levels? Has the thrill gone? Are your relationships in trouble due to the business? Was your turnover this year the same as last year?”

 “New competitors, still eager and hungry, enter the market. They bring new technology and fresh energy, which is very hard for a demoralised and struggling business owner to counter,” Prema says.

Prema offers a few tips for companies that may be showing signs of failure:

1. Don't make big decisions without expert advice and good data

“Surround yourself with business advisers who know how businesses work and know the numbers. Do monthly management reports, because without them it’s simply impossible to know what’s going on. If you wait until you get your annual financial statements, it may be too late.”

2. Take ownership

“I have experienced so many struggling business owners who blame everything and everyone one else for the predicament. Don't shift the blame. Instead, learn from what’s happened, take ownership, accountability and responsibility – be honest with yourself,” says Prema.

3. Take action

It may be possible to turn the business around, but doing so requires that the business owner is sure about his or her purpose, vision and mission.

“No business succeeds without marketing and sales, and having just one source of leads – like referrals – is risky. Diversify your lead channels.”

4. Quit when it’s time to quit

Take expert advice and exit before things get too bad so you can avoid liquidation or receivership.

“It may be possible, if you do some work on your systems and processes, to sell the business. If you have debt, talk your creditors or look at a debt consolidation loan so you can exit gracefully, instead of borrowing to keep a sinking ship afloat,” concludes Prema.

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