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Unfortunately the story I have to tell is not a happy one.  I could put a positive ‘spin’ on it, but I prefer to tell you the ‘bald’ truth in the hope we can all learn a lesson from it.

It’s a story of a client who unfortunately came to us about two years too late for us to save them from Administration.

The business started nearly 30 years ago and became very successful and profitable.  About five years ago they branched out into a new division, complimenting their existing business.  The growth wasn’t properly planned and inexperienced people were put in charge of the new division and left to do their ‘own thing’.  They had no specific job descriptions and no budget and there was no communication between departments.  As the owner was very ‘hands on’ himself he left them to it, presuming all was going OK because that’s what he was told when he asked.

It became apparent that some large jobs were finished at significant losses.  Purchasing of materials etc. was done on an ‘ad hoc’ basis with no comparative quotes sought.  Cost ‘blow outs’ were the ‘norm’ and no variance reporting was done.  Overheads were completely out of proportion to revenue with too many managers who weren’t income producing.  It’s easy to say “Why didn’t he make it his business to know?” but he believed his employees.

Some warning signs were apparent for some time

1. The owners were injecting cash into the business

2. The owners sold their home to downsize and inject proceeds to cover creditor payments

3. They borrowed cash from family members

4. They took on more credit cards to access funds

5. A few creditors ‘stopped’ supply, so managers shopped around to find others

6. There were no cash flow forecasts prepared, so no understanding of cash position

7. The management of cash was left to an inexperienced person

The business owner knew ‘deep down’ he was in trouble, but did not face reality soon enough.  Unfortunately, as I said at the beginning, we got there too late.  The emotional effect on the owner and his family is enormous, as well as the financial hardships that they will encounter.  There are no winners in this scenario – many lives will be impacted.

The moral of this story is that you may not know what you don’t know.  Unless you are absolutely across all aspects of the financials and performance indicators in your business, you could be heading for real trouble without realizing it.

What could this business owner have done to avoid this problem?

1. Sought business advice from an ‘independent’ before embarking upon expansion to determine ‘feasibility’.

2. Before injecting personal cash into the business test it on a financier – if they won’t lend to you, you have to ask why?  They usually know more about ‘risk’ than anyone.

3. Checked the existing business was running properly before growth