I was having tea with my mentor yesterday morning when we reminisced about our past business counterparts and their current endeavor. We gossiped about the latest news pertaining to one of our dealer called ES Trading Ltd (not the real name). Apparently, this company had its account with a major supplier terminated due to an excessive bad debt owed to the latter. The reason. A trusted delivery personnel of ES Trading trusted to collect receivables, absconded with the collection when the proprietor went for a holiday. So much for knowing how to trust your staffs.
The owner of ES Trading Ltd is a typical entrepreneur that you read in most business magazines. Hardworking, ever ready to hustle, good with customers, the boss always tried his best to scale his business as fast as he could. The proprietor did most of the dirty work in the initial years of establishment and as the business grew, started delegating operation related tasks to his staffs. In other words, this owner’s sweat and blood are traceable in every cent that this company made.
What went wrong then?
82% of Business Failures Are Due To Cash Flow Problem
When your expenses exceed your cash in hand, you have a cash flow issue. For a supplier who is also a public listed entity to blacklist a major dealer for a designated area is a sure fire indication that the latter had fallen into a major cash flow problem. The supplier’s manager once in charge of ES needed to cover his own a$$. As a result, he followed the company’s protocol by terminating all dealings with ES and to issue a legal letter to the dealer.
So coming to this, what are the main recipes of cash flow problems.
1. Gross Negligence
I suspect in this case, the boss of ES had failed to track the company’s collection and cash flow. The deliveryman had worked hard and gained the trust of the husband and wife team after a certain amount of time. I bet the boss allowed the crook to experiment with delayed cash submission. Something like the way a pedophile groom a victim, this criminal acted the same way by numbing the sense of the boss to occasional innocent bouts of forgetful return of collections. The owner could have avoided such financial disaster by handling the collection himself or if he did trust his subordinate, just delegate a small percentage under a watchful eye. Come on, you can’t be lazy when you are the owner of a small company. Read about the beginning of star and the sun of in my past article “The Six Levels Of The Entrepreneurial Journey“.
2. Uncontrolled Expansion
This happens when the business owner judges success as the rate of sales growth and expansion. I was in Taiwan last week and there was this local tour guide who bragged about his previous experience as one of the owners of a manufacturing company in China. According to him, the company employed 500 workers during its peak and due to their obsession in growing the business, they fatally overlooked the “hidden” cost dealing with the government officials. Cases like this happen all the time. During the overzealous expansion, business owners usually overlooked lots of unprecedented miscalculations that brought them into cash flow crisis.
3. Confused Good Debt From Bad Debt
I don’t agree to use debt as a means to expand a business. If you do want to use debt, learn to separate the good debt from the bad debt. Good debts are borrowed funds meant solely for business expansion, such as investing in machines and raw materials. The problem starts when the business owner mistook sales as profit and abused it for self-gratification like new cars and new toys. These are bad debts where you borrow to splurge on luxuries not meant for your business.
If You Want Peace of Mind, Forget About Partnership
During my years of experience working in both startups and established the business, I have come across three breakups in partnership. Personally, I experienced one of them and surprisingly, all three breakups happened due to different reasons.
No matter how good a relationship you think you have with your partner in the beginning, everything crumbles when you guys continue to lose money.
I was employed by a mid-sized bakery as a business manager in 2006. In 2008, we decided to enter into a partnership with our main distributor to build a supply hub that catered to the needs of the central part of the country. If you want to know more about the story, you can click here. The JV never broke even and both parties carried disdain for one another till the fateful day when our partner asked for a breakup.
If we scrutinize this partnership, the collaboration was a recipe for disaster. We were a corporate setting where bureaucracy was a norm whereas the other party was a family run business. Both entities had a completely different set of values and culture right from the start.
2. When Partners Have Different Goals
In my last stint as the GM of a subsidiary of a public listed company, I got to know the previous owner who sold the subsidiary to my employer. He was also my predecessor who was assigned the post of the GM as part of the prerequisite condition in the sales and purchase.
Well, before the company sold, it was making tremendous sales and profits. It used to be the top five biggest commercial bread manufacturer in the country. The former GM, let’s call him Mr. Steward, had a partner who happened to be Steward’s uncle. As I recall, the partnership was 50:50 and Steward was instrumental in the day to day running of the bakery’s operation whereby the uncle looked after his own mining business. During the lean years in the mining business, the uncle kept drawing money from the bakery to save his mining business. According to Steward, his uncle was so immersed in the mining entity that the latter completely ignored the well being of the bakery. All these despite the bakery being the golden goose that laid the golden egg. The uncle’s careless attitude finally broke Steward’s patient when both decided to sell off the business.
3. Too Many Cooks Spoil The Broth
And this is another story that involved a butchery business. The CEO of the business, whom we called Mr Hog, was the son of one of the founders of the Hog Siblings Ltd. In other words, Mr Hog was the second generation owners of the company. Mr Hog and 14 other siblings and cousins co-owned Hog Siblings Ltd and although the company was extremely profitable, Mr Hog being the CEO was stressed to the limit.
As the CEO, Mr Hog was not only held accountable for all the legality of the company, his partners were making excessive demands. The company paid for the partners’ day to day expenses, children’s overseas tuition fees, and others. Under the counsel of his lawyers, Mr Hog decided to gather all his siblings to sell off the company. He knew needed to move fast to escape the heavy burden of leading Hog Bros. As a butcher, Mr Hog acted at breakneck speed. He sold off the whole company, axed all his cousins from the board and only got his own brother and himself to manage the new entity. He did this under the condition of the company sales and purchase.
As you can see from the examples above, you could increase your chance of business success just by staying solo. Further down the road, avoid the lust to expand for ego’s sake. Please be smart. You should scale if there are genuine organic reasons to support the growth but stay away from the sin of betting all your chips in untested opportunities. Improve the odds of success by eliminating unnecessary variables that might uproot our cause.