In pursuing strategic objectives all businesses are inevitably exposed to risks that could prevent those objectives from being realised in part or in whole.

It is only by taking on the challenge of managing risk that a business can hope to succeed in the short, medium, and long term.

Most successful businesses don’t try to eliminate risk in totality. But they do attempt to ensure all significant – or material – risks are identified, assessed, and their potential impact managed in a cost-effective manner, to achieve an acceptable level of risk by deploying appropriate controls.

In this post, we focus on three types of business but the principles cross industry lines and are relevant to many other types of companies.

The one risk factor that will kill any business and kill it quickly is lack of cash or liquidity.

Cash is akin to blood. Just as the body dies if blood is drained from the flesh, businesses fail if cash isn’t steadily rolling into and out of the business (as creditors, banks, and staff are paid). If your business has this steady flow, it’s also important that your cash reserves are building as they provide a buffer against a rainy-day event and allow you to make additional investments and so increase your wealth.

The reasons legal businesses fail, as with any business can be numerous, but in the end the results are almost always a lack of cash resources. This flow of cash is often referred to as liquidity in finance textbooks.

Consider the following factors that could describe why a legal practitioner’s business might fail:

• • A lack of differentiation from competitors. That ability to stand out from the crowd.
  • Lack of understanding of clients’ needs and requirements leading to loss of client satisfaction and a poor reputation.
  • Having a poor location that simply doesn’t get people through the door.
  • Having no strategic focus in the short, medium, and long term. Successful businesses set goals and focus on them monitoring performance against key performance indicators.
  • Lack of perseverance. Success is a road that is always under construction and taking us somewhere new. Unsuccessful legal businesses fail to learn from setbacks or fail to make changes to their systems that allow them to weather storms and recover.
  • Failure to learn, change, and adapt to conditions.

Looking at these factors, which should be considered as a non-definitive list of examples, all will lead to a reduction in cash coming through the door. 

Cash is king. And when it stops coming through the door any business – as we shall see from two additional examples – is likely to fail.

Consider the following risk factors which may lead to a construction business failing:

• • Failure to innovate: New technology such as Building Information Modelling (BIM) is rapidly changing how buildings are designed and constructed. Those that don’t invest in new technology risk being left behind in the wake of their competitors who do adopt new more efficient practices.
  • Poor and inefficient employees and executives: If a company’s managers and employees aren’t engaged or valued the business is unlikely to perform according to expectation.
  • Failure to plan: It is vital that a business has a defined plan that is communicated to and understood by all managers and employees.
  • Poor performance on a key project: This can quickly cause irreparable reputational damage.
  • Growing too fast and too quickly: Often construction companies grow too fast or too quickly and don’t have the requisite manpower, resources, or know-how to manage and sustain that growth. This often results in a severe depletion of cash resources, a phenomenon referred to as “over-trading”.

Like all businesses these risk factors, if they happen in isolation or in concert, can significantly reduce the amount of cash coming through the door. Choking off the cash, or blood of the business, increases the likelihood that the business will fail.

In respect of a medical business consider the following risk factors which may lead to the business failing:

• • Failure to track collections from insurance companies or individuals who have made private arrangements with the medical business to pay outstanding sums over a defined time-period.
  • Assuming expert skills alone will create or result in the building of a viable business. Any medical business that focuses purely on care and doesn’t develop a viable and effective business model is unlikely to succeed.
  • Failing to spot billing irregularities.
  • Staff working inefficiently.
  • A high percentage of declined claims from insurance providers who are supposed to cover the cost of care provided to patients.
  • Lack of financial planning, detailed budgets, strategic objectives, key performance indicators etc.

Again, all the above risk factors are likely to significantly reduce the volume of people and cash coming through the door.

Individual businesses don’t operate in a bubble. Often they are measured against what competitors are doing.

Hopefully you can see that cashflow management is vital to all businesses irrespective of type.

Cashflow – the amount that comes into and goes out of a business – must be properly managed and maintained. If you don’t manage the cashflow of your Trinbago business, it is likely to fail whatever the type of business.

What does this mean in practice?

Well, it means making sure that you are billing for all the work you perform, and that you are getting paid for that work on time (vital if you provide goods or services on credit). Paying your own suppliers and staff on time is vital to.

Maintaining a positive cashflow – increasing the volume of blood in the system – allows all businesses to pay debts and maintain an emergency buffer as mentioned above.

When cashflow slows to a trickle, or if you have bigger outflows than inflows of cash business failures are much more likely to occur.