It’s a commercial reality that people fail in business and there are no new ways to go broke according to insolvency expert John Morgan of BCR Advisory.
Addressing more than 60 franchise professionals and accountants at the Franchise Accountants Network conference in Sydney on 1 November, Morgan focused on the defects that bring a business to its knees.
Business failure is a process rather than a single event, he said.
Behaviours such as dishonesty, fraud, creative accounting, poor morale or an over-extravagant lifestyle are typically regarded as causes of business failure but are in fact symptoms of business distress, he suggested.
No new ways to go broke
Bad management and financial issues cause business to fail, he said.
He had warnings for those leaders who take an autocratic approach.
“They’re usually they’re the leaders who start the business and they get to a stage of business where their leadership style doesn’t work. They’re usually really good salesmen or technicians, they’re not so good at finance.”
Morgan suggested lack of skills diversity in management is a concern.
“An unbalanced top team, a team full of engineers, or accountants, or lawyers, they all think the same way. You need people who think differently. Someone who is strong in each area offering solutions, innovative mentality.”
However leaders need to not only bring in expert skills they lack, but listen to the advice. Morgan told the financial officers in the room, “as CFO, if you’re not being heard it’s a waste of time”.
Common mistakes in young and emerging businesses
Morgan pinpointed five ways a business can get itself into financial trouble:
- Over trading
- Too big a project
- High gearing
- Problem borrowing
- Under-capitalisation
It is also vital for businesses to respond to change, he said.
Franchisee failure model
A separate set of problems can trigger the collapse of a franchisee’s business;
- Poor due diligence
- Ineffective pre-purchase advice
- Unrealistic expectations
- Overly optimistic
- Wrong fit
- Lack of training and development
- Failure to evolve or complacency
- Allowing other businesses to distract
- Failure to follow the system
But despite the headlines, franchising is a positive model, he said, citing a failure rate of just 5 per cent [unofficial industry sources].
“This is a strong and very successful business model. Everybody gets wealth out of it if you do it honestly.”