Profitable companies are started by entrepreneurs who want to solve a problem better. A secondary consideration is creating a better lifestyle for themselves.
The UK is a great place to start a business, but survival rates are low. Many studies have consistently found that 50% of new companies fail in the first five years. Of those that survive, many stall, zombie-like, unable to grow.
These businesses manage only to create a job for the owner without the financial success that was the original aim. That job often does not pay well either, for all the experience and effort put in. The result is a life of stress and servitude rather than the warm glow of success and an improved lifestyle.
A company failure rate at 50% is too high – Why is this and what should we do about it?
Every company failure will be for a good reason. They run out of money, the market changes, a key trading relationship fails, or the tax and regulatory system just makes it too hard to run a profitable business.
These are all valid reasons. Entrepreneurs are human, and it is simpler to blame others for their misfortune. The main single reason, though not one that is heard often, is that the owner just did not have the talent for the job.
The capability of the leader is the main determinant of a company’s success
The biggest single determinant of success for profitable companies is attributable to the capability of the owner.
A career spent supporting profitable companies for many years, confirms this view, time after time. Research by Gallup into 4,000 businesses in Europe and the US supports this contention. They found that the capabilities of the company owner were the most relevant factor in the success or otherwise of a new business.
When a company fails, it is common that one or more of the following traits present. These traits or “sins” are all manifestations of shortfalls in the required personal core-competencies of a successful entrepreneur.
They are deadly sins because at best they prevent entrepreneurs from achieving their desired financial success and lifestyle. At worst, they can kill a company.
The 7 deadly sins to avoid for business owners who want to grow profitable companies
Sin 1 No clear strategy, business plan or risk management leading to a weak business model
Sin 2 Poor leadership and communication of the business aim to the team/customers
Sin 3 Poor financial management and control of working capital
Sin 4 Under-investment, failure to innovate or predict competitor actions
Sin 5 Poor systems and lack of relevant data for decision-making
Sin 6 Poor execution and failure to prioritise the important over the urgent
Sin 7 Not customer focused but inwards looking with no compelling value proposition
How to rectify this?
The good news is that the problem is easy to fix.
Most leaders do not have all the skills needed. Wise entrepreneurs surround themselves with people more talented than they are, particularly in areas where they have a weakness. In addition, they make sure they get good advisers around them.
First, get a part time finance director (FD) even if only for a day a month to deal with the forward looking and strategic issues. Someone who can also be a mentor, guide and sounding board.
A good part-time FD has seen it all before and can steer you around the bumps in the road, fast-forwarding your business through his experience and contacts.
The finance director’s responsibilities
The finance director’s usual title is FD or in larger companies, CFO (chief financial officer). FDs cover all the strategic and operational areas of the business. Although focussing on financial management, anything important will cross the FD’s desk at some stage. They input into every area of the business and often also take the lead on systems, IT and HR.
Education and training
Many FDs are graduates, with an accounting qualification from one of the main accounting bodies. For a summary of those bodies, see Wikipedia.
The MD’s eyes and ears
The FD’s partnership with the MD is crucial, and it is one built on trust and respect. The FD is the MD’s eyes and ears. The MD should be steering on the bridge with the FD setting the course and checking the position. They set the vision and delivery strategy and need to work together in harmony.
A major input to every area of the business
The FD ensures the accuracy of the numbers and distributes them as a framework for better decisions. They look forwards, anticipating problems, planning ahead and managing risk.
The FD contributes to all areas of the company. They should drive financial performance, operational efficiency, cash flow, taxation, legal and investor relations.
The soul and conscience of the business
An FD needs a deep knowledge of finance together with integrity, scepticism, independence of mind and strength of character. Holding the MD to account and avoiding group think needs good communication skills. The FD links the Board and management, gluing the business together and maintaining a common purpose.
FDs “glue” the business together and preside over the decision process.
By using a part time FD, you get financial expertise just when you need it.