Target Management Advisory carried out a small and random survey of 14 businesses that went out of business during the depths of recession in 2010.
The results show the fatal hazard of a rapid and significant loss in revenues for whatever reason in firms that were unable to adjust their cost of sales and/or had relatively high fixed costs to variable costs.
Short-term cash flow then swiftly became a problem, stressing the impact of a dramatic reduction of cash at bank and/or straight revenue losses. Interestingly, no one in the survey reported business as normal that was destroyed by a cash flow problem because the bank withdrew facilities due to the credit squeeze. On the contrary, it was apparent from the responses that any lack of bank facility was due to the significantly reduced trading position of the company and the likelihood it would not survive in the short or medium term.
There were also no reports that bad debts or late payments by customers caused problems and there were no significant non-financial effects contributing to business failure, other than the unhelpful fall in the value of sterling for importers.
The survey was too small and random to say anything quantitative about demise and age, size and adaptability but it does highlight the disastrous effects of short-term cash flow problems even on nominally profitable firms.
This suggests that flexibility in managing output is important and more important than attempting some ambidextrous strategic response.
If you would like to discuss these findings further or talk about the possible impact of cash flow issues on your business, call me, Stephen Herman, on 07825-189263