The three types of business conditions
The circumstances (state, status, condition, etc) of a business can be described in three ways:
1. Exponential or stable growth
2. Stability or stagnation
3. Business decline or financial hardship or financial distress or business failure
A failure of a business causes a lot of hardship in the life of the businessman many stakeholders around him. Business failure cannot be always claimed to the external environment of the business. Even within those failures which can be attributed to the business environment there is a category in which partial plane can be put to the management of the company. Company by nature is expected to be prepared for at least for the typical kind of shocks that many businesses space from time to time. It can be understood if a business fails on account of a completely novel business shock such as the COVID-19 impact on business. But the business cannot presume that all will be well all the time. We have classified the internal errors or negligence that you need to tell your of a business into three types.
There are some areas in which the Indian small and medium enterprises do not take any action. There are some other areas in which they take an action but it is not correct and sufficient. But the larger is an his complete negligence for certain essential activities of financial nature. The reason for not undertaking these activities is lack of knowledge about them, lack of knowledge of the serious effects if they are not carried out, etc. Many times, SMEs do not undertake these activities only to save a paltry sum payable to the chartered accountants or financial experts.
No financial planning
No financial analysis
Poor cash management
Insufficient capital provisioning
Shortfall in working capital
Delayed recovery of receivables
Reducing profitability every error.
No risk mitigation measures
Price war, stagnation
No computation of overheads
Improper allocation of overheads
No provisions for contingencies
Poor credit rating, CIBIL
Poor bank relations
Please there are very very few instances of companies having failed because of incompetencies in the technical and operational areas. Even within operational areas, almost 99% failures can be attributed to the market movements. Operations is the core strength of any manufacturing company and is least expected to fail it. But many operational errors and Measurement cause financial hardship at least for temporary time. Below is the list of the major operational decisions that can go wrong and cause financial distress.
Absence of project plan
Delays in project completion
No necessary certifications
Absence of marketing infrastructure
Poor contracts with clients
Loss of key customers
Ineligibility for tenders
Absence of efficient procurement
Low capacity utilization
No product basket rationalization
Rejection due to poor quality
Absence of innovation
Unexpected regulatory development
Poor documentation, communication
Logically a business should be all about getting money, putting up plant, selling the products and making money. But all these activities are carried out by human beings. There are no standard rules of managing human beings. So the one problem area is Managing the work culture of a company. Management has complete command over all the employees and can issue policies from time to time to better the work culture and to increase the employee output. A businessman is seen as the leader by the employees and it would be fair to say, in most circumstances, they like to or they have to, follow him. But what about the the board of directors, shareholders, promoters, lenders, strategic suppliers, strategic clients, mentors, government officials and highly experienced proven expert managers?? All of them belong to the same league of status. The employees are afraid of job security and they end up falling in line willingly or unwillingly. This is not the case with the topmost stakeholders in the company. Their life is mostly already secured. Their individualistic & aspirational ethos, affectations and volitions take the first seat, even before a rational financial behaviour. People generally come together in a good mood with good intentions. But after a period of time, it can be seen that a lot of differences have propped up. There is disharmony and fiction. A lot of it can be directly attributed to the situational parameters that are beyond anyone’s control. But not everything can be blamed to the external circumstances, changes in people’s attitudes, unfortunate events, etc. A company can ensure that the happy, harmonious, healthy, effective, efficient and motivating relations between the top people are preserved for many years together. This is enabled by creation of a setup of documents which describe the nature of treatment of various events and circumstances, authorities, rights and obligations, risks, duty, incentives, exceptions, assets, liabilities, principles, entry routes, exit routes, dispute resolution, etc. All this is called corporate management. Mostly the Indian small and medium enterprises do not pay any attention to all these corporate management requirements and get associated on good faith basis. No documentation is done, or it is done only for compliance, or it is done very shabbily. We have listed below what all things and development happen in the company which may ultimate lead to its failure if not addressed in time.
Friction in the management
Loss of business partner
High attrition of employees
Loss of key employees
Frauds & corruption
Absence of policies
Poor reporting structure
No professional training
Poor working culture
No use of modern technology
No business data to analyse
Absence of compliances
No participation in industry activities
So, what is the learning?
It requires everything to grow and to excel, to prosper and to sustain and you cannot leave anything behind; but negligence on only one front might be sufficient to completely fail the business.
Apohan provide end to end services in all about three areas right from the planning stage to full implementation.Availing strategic services from Apohan means staying farthest from the business failure on account of financial management and corporate management reasons.