by Barry Marcus

Created on: December 30, 2008   Last Updated: April 04, 2010

The current recessionary climate has caused many businesses to fail. Committed to high costs, they face falling revenues. Cutting back only makes matters worse. With fewer staff, service levels drop and customers vote with their feet. The business moves from profit to loss and is forced to close.

CASH FLOW – THE BIGGEST KILLER

New businesses fail in large numbers because of cash-flow. Many new businesses start with viable ideas and good products. To the outsider it may seem that the business is thriving. The founder is onto something good. But a few months down the line the business has shut its doors. Cash flow is the biggest killer of new businesses and can even impact negatively on larger more established firms.

Staying in business is not all plain sailing. Expenses have to be met now, while paid is a different story. Suppliers often insist on upfront payments for goods and services especially when the business is new and does not have a track record. The staff must be paid on time – usually at the end of each month or week.

The expenses that must be met can be considerable. The projected earnings may be substantial, but the inevitable delays in collecting these earning can cause a cash flow crisis.  

Many customers - especially the large retail outlets - pay their suppliers anything from 30 days to 120 days later. In spite of the fact that the new business is running at a profit the delay between expenditure and income is just too long and the business is forced to shut its doors. Although there is money in the pipeline, there are no funds to pay the staff.

HIGH COSTS

The global economy is cyclical by nature moving from boom to recession and back to boom. Through boom times many businesses grow to meet increasing demand. New plants are built to increase capacity, new branches are opened and contracts signed.

The unexpected onset of a recession may mean that the business is suddenly faced with reduced sales and high fixed costs. Suddenly, there is spare capacity. Last years profits are transformed into major losses and the business has nowhere to turn.

Every industry has its own economic cycle that may be distinct from the global cycles that affect every industry. While one industry booms, another may be struggling for survival. These cycles are often difficult to predict. It is generally the businesses with high fixed costs that suffer most.

COMPETITIVE SHOCKS

A thriving business sometimes has to face dramatic changes in the competitive

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