This couldn’t happen in your business…..could it?

You may not have heard of the company but you will almost certainly have heard of its brands Bargain Booze, Wine Rack, Bibendum and others, despite which Conviviality plc, the brand owner, went into liquidation last week after making three profit warnings in just over one month.

Another example of an avoidable business failure by a business that didn’t know its numbers.

In Conviviality’s case the sequence of events that led to its downfall would almost be laughable if it weren’t for the 4,000 employees whose jobs are at risk. An arithmetical error in a cash flow forecast and a £30million tax bill that got overlooked.

Well that could never happen in your business…..could it?

You see the real problem at Conviviality was a combination of growing too fast and poor management controls, which in turn, of course, comes down to management taking its eye off the one ball that matters – it numbers.

And this could very easily happen in your business, particularly if you are growing, or scaling as it’s sometimes called.

There are three problems that a business faces when it attempts to grow too quickly without the necessary controls.

1. A lack of capital: growth eats up working capital as stock, debtors and overheads increase exponentially and faster than cash flows into the bank account. An essential ingredient of a proper growth plan is a robust and regularly updated cash flow forecast. But this doesn’t mean a forecast pulled together in the accounts department by the young analyst who’s ‘good with Excel’. Spreadsheets are notorious for the errors that can occur and not be found; that isn’t to say they aren’t a useful tool – quite the opposite, but they must be used with care and the checks and balances that are available built in. Alternatively there are now a range of good forecasting tools that link with cloud-based accounting software that’ll do the job for you and can update in real time as you process your accounts.

2. A lack of, or poor, systems to combine data from different businesses: whether by organic growth or by acquisition, new income streams will have different metrics around margins and cash flows. Unless these are well understood and rapidly built into financial models a false view of reality can be accepted as the truth with devastating consequences. Suddenly there’s no cash to pay the wages or the VAT bill. Too many businesses seek growth before putting in place the systems they need to deliver accurate and timely financial information.

3. A reliance on inexperienced staff: as a business grows so does its complexity, and owners who were very close to everything that was going on soon become more remote and have to rely on people in key positions – often in finance – to monitor the numbers. An investment in a commercially minded accountant is frequently left until too late by many growing businesses.

There is no doubt that the failure of Conviviality was exacerbated by inept management at the top who lacked the wisdom and experience to grow the business in line with its capabilities; I have said before that the unwillingness of businesses owners in the UK to undertake robust business and financial training is a major issue which comes into stark contrast when the going gets tough.

Failures such as Carillion and Conviviality will continue, as will the less public failures of private companies that suffer from the same weaknesses. Don’t let your business be the one not to learn from their mistakes.

Noel Guilford, Principal at Guilford Accounting
Noel Guilford is the principal of Guilford Accounting a small business accountancy practice specialising in advising owner-managed businesses on current accounting, finance, and tax matters. You can reach him via email at noel@guilfordaccounting.co.uk or by phone at 01244 660866. He is the author of the 'Figure it out - an entrepreneurs guide to understanding your business numbers' which you can obtain by visiting guilfordaccounting.co.uk.​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ His latest book, How to Build a Successful Business' will be published in 2018.

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