Asoka is an Independent Finance Director and Management Consultant based in London. He works with growing companies as their part time Finance Director and is the Founder of AKCA Consulting, which helps companies improve their financial health.
Yes, you can!
Here are some scenarios where your business can be very profitable and still go bust.
1. Growing too fast – a business can grow too fast and tie up cash in debtors and inventory, running out of cash to pay suppliers.
2. Big deal sours – too much attention is put on one big deal over a long time which goes sour. Meanwhile you’ve lost your other customers and run out of cash.
3. One large customer breaks the bank – they can pay their bills very late, stop doing business with you or go bust themselves.
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4. Supplier jacks up the price – your inventory shoots up in cost which you can’t pass on to your customers.
5. Too much debt to repay – servicing the interest is fine but you have repay the capital at some point and if you don’t have enough cash, you could go bust!
6. Get sued – a business can get sued for breach of contract, negligence, patent infringement or other damage caused and if you lose large enough it can cost you more cash than you have.
7. Overheads creep up – invariably overheads go up and if profits head south for whatever reason and you can’t cut costs fast enough, you lose cash.
8. Over committing to capital expenditure – big plans to expand a plant or machinery is fine as long as the bill can be paid. If there is a downturn or anything else goes wrong you can run out of cash.
9. Disaster strikes – fire or other disaster strikes and you’re under insured! Make sure you have adequate cover for property and plant, business interruption, plant breakdown, key man, inventory loss etc.
10. Obsolescence – the world is moving ever faster and you have to cater to your customers tastes – think Kodak!
Can you think of other scenarios?