How to Diagnose Business Failure is episode 51 of I Hate Numbers podcast. The podcast is part of a wider mission. It's to help your business improve your money mindset, get closer to your numbers, make profit, survive, and thrive.

Firstly, in last week’s episode we looked at one way of looking at business failure. Secondly, the words poor and leadership were common factors.

Why diagnosing Business Failure is important 

Running your own business is risky. Above all spotting and assessing business failure gives us insight, strength and purpose.  Certainly you get to understand your own strengths and weaknesses, and those of others.

We can use this approach looking at our own business, as well as other peoples.

Listen to find out more.

How to develop a business framework.

 Numbers are not everything. Your numbers help paint a story but can’t paint your complete story. We dive into performance management and look at the Argenti framework.

The Argenti approach looks at

• Defects leading to
• Mistakes leading to
• Symptoms of Failure

Defects are about management weaknesses and accounting deficiencies. Your mistakes are typically

• Over trading
• Gearing
• Big projects

Listen to find out more

Most importantly, How to diagnose Business Failure helps you figure out your solution.

In this episode we see that growing is not always good. As a bonus check our free online break even calculator.

If you have topics you want explored in future episodes, then let me know.

To sum up, the show is there to help you improve your money mindset, make money, survive, and thrive. Get in touch with us to see how we can help you with your accounting and business needs. Subscribe so you do not miss an episode of I Hate Numbers. For more business and finance, news, advice and tips

Listen to find out more

In This Episode

• Appreciating that diagnosing Business Failure helps you fix it
• Being aware of the practical application of the Argenti framework
• Understanding what mistakes, defects and symptoms of failure are
• Seeing that growth isn’t always positive
• Developing your own Numbers confidence and decisions
• Take more control of your numbers to help make you money, survive and thrive

Links

https://podcasts.apple.com/podcast/proactiveresolutionss-podcast/id1500471288

https://play.google.com/music/m/I3pvpztpjvjw6yrw2kctmtyckam?t=I_Hate_Numbers

https://open.spotify.com/show/5lKjqgbYaxnIAoTeK0zins

https://www.stitcher.com/podcast/proactiveresolutionss-podcast

https://tunein.com/podcasts/Business–Economics-Podcasts/I-Hate-Numbers-p1298505/

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. My name is Mahmood. I'm a working accountant, running my own accounting firm, and I've been helping and supporting businesses of all shapes, sizes, type, and form over the last 26 years. Now, the I Hate Numbers Podcast is part of my mission to help your business improve your money mindset, get closer to your numbers, make profit, survive, and thrive.

What's not to like about that? Now, in last week's podcast, Episode 50, I talked about business failure and leadership, and we looked at the four key areas that link to business failure. Check out last week's podcast. There's some great nuggets in there. Now for this week, and I want to have a look at an alternative way of assessing potential failure.

Now, quite rightly, you might be thinking, good question, Mahmood, but why bother? Well, there's a number of reasons for it. If we can spot it, if we can have a different way and way of looking at business failure, then that's good for our own business, so we can prevent that actually occurring, put things right, but also when we deal with our customers, our suppliers, we want to form partnerships or relationships with those stakeholders, or even when we wish to buy another business,

having that in the back of our mind, knowing what we're spotting and what we're looking for is a great way to develop that business relationship and strengthen it. Now, if there are loads of ways of assessing potential corporate failure, financial numbers can give you some insight, but as indicators in their own right of organisational performance, there are limitations.

What I'm going to be looking at in this week's podcast, number 51, I should reinforce, is I'm going to be using a framework which rests in the world of performance management and it's an approach that I've talked about to other businesses as well as accountants of tomorrow when I've taught professional courses.

Now, the approach we're using, and we're not going to drown this with jargon or academia, is called Argenti just to give it due credit, and what we're looking at in this podcast is a three interconnected framework. We're going to look at defects, business defects, and the reason we're looking at business defects as business defects lead to mistakes being made.

We have a look at what those mistakes are, give some examples of them, and the third knock on effect is defects lead to mistakes, which ultimately leads to symptoms of failure. When we get to that situation where we've got symptoms of failure, how things are manifesting themselves, it doesn't mean it's the end of your business life.

It doesn't mean it's the end of the business that you're looking at or the customers that you may be evaluating. There are still things we can do to put them right. Okay, let's crack on with the broadcast. Now, I said at the beginning, this framework of looking at business failure, when businesses fail to actually sort of generate the value they need to, or they're actually at the insolvency deaf door, the first area is to looking at defects.

Now, defects themselves can be subdivided into two broad areas. There are those that are categorised as management weaknesses, and there are those that are classified as accounting deficiencies. Now, typical examples of management weaknesses. See if you can spot them in your own business or you spot them in businesses that you have dealings with.

Typically, they are things like autocratic chief executives, so those people who literally say, is my way or the highway. Are you that business leader? Do spot that in others. It’s a failure in your business to separate the role of the chairman and chief executive. You may have a board of directors, you may have a senior management team, and if you have a critical look at that.

Are they passive? Do they interact? Do they question decisions? Do they involve themselves? Passivity is not a good way to go. There may be a lack of balance and skills in your management team. So, do you have a good mix of finance, legal, marketing, IT, HR? And this is a framework, by the way, that applies to private businesses as well as not-for-profit businesses.

Having worked in the not-for-profit sector, I should hasten to add things like governance and management structures are always constantly looked at. But again, ask yourself as a business, do we have a good balance of skills that are necessary in our management team? If not, then that is time to do something about them.

Weak finance directors. Now, because somebody is actually an accountant or may have that background experience, are they taking an active role in actually moving your business forward? Lack of management in debt and poor responses to change. Now, in previous podcasts we've talked about business resilience.

Check out the show notes at the end for links to previous articles and blogs and resources we've talked about, but if you've got any of those management weaknesses that is recognised as a defect, typical accounting deficiencies that may be present in your business or those of others is a lack of budgetary control.

So, do you have budget systems in place? Do you actually look at your budget? Do you monitor it? Lack of cash flow planning and no costing systems. If there is no way to track what things are costing you, if you don't know what the impact is in economic terms, you've got weak costing systems. You can't price correctly.

You don’t know if things are making your profit. Those are all accounting deficiencies. Having dealt with defects, now let's look at the area of mistakes being made, and remember, defects that you have in your business will lead to mistakes being made. Typical main mistakes that will exhibit themselves in business, and I'm going to throw a tiny bit of jargon here is what we call gearing.

Now, those of you who may have come across gearing, we're not talking about what's in your car. The Americans call it leverage. And gearing is ultimately a measure of risk. There are two aspects of gearing. So, if you borrow lots of money and you've got a high amount of debt, you are said to be highly geared.

If you imagine as an individual, if you conduct your lifestyle, your personal life by having a large amount of credit card borrowings, money borrowed from friends and family, overdraft, et cetera, you are said to be highly geared. Now, it's a risk because you've still got to service the debt, pay off the minimum payments, pay off the loans, and if profits are volatile, then that's a very major risk.

High gearing also occurs when you have a large fixed cost base. The second main mistake that's likely to occur is what's called overtrading. Now, overtrading, that's a technical term. Let me expand on what that actually means. Now, growth is good, but not all growth is equal. So, if your company enjoys rapid growth, so your sales line is going up, customers love what you are doing, they're buying more,

if you don't manage that growth correctly, that can actually be counterproductive and bad for you. So you think, imagine the scenario where your business is growing rapidly, but you don't have the internal infrastructure. If you don't have sufficient staff to cope with things like credit control, servicing your customer, you're investing in lots more inventory, overtrading is a bad thing, and typically it's high sales growth with minimal investment in internal infrastructure to manage that growth.

So again, overtrading is a bad mistake. The last main mistake that is likely to occur is where you might have what's called a vanity project or a major project where you're investing lots of time and energy, hoping that's going to be the thing that drives your business forward. Now, that's not to say you shouldn't have innovation, but if your focus is too much on one single project and is likely to be such that if that project does not materialise, that can have a major impact on your business.

That is a mistake. Again, it's not saying the mistake in itself is bad, but keep an eye on those things. So, high-gearing, overtrading and the big project, those are all typical mistakes that are made that are rising from defects. The last aspect of this triangle that I'm going to talk about is the symptoms of failure.

Now, this is the final stage of the process, and this is when the symptoms of failure manifest themselves. Symptoms of failure typically are classified amongst four main categories. There's the financial signs, so typically a depletion or a reduction in your operating profits, a decline in your profit base.

Cash flow is suffering. It's taking you much longer to pay those bills because customers aren't actually paying their bills on time. That would be an example of a financial indicator, a financial sign. Creative accounting. So, when you are optimistic, you want to massage those figures. You present a face to the public, to lenders, and suppliers. You may try to manipulate,

be creative in the values that you place on assets in your business. Typically, certainly, we've seen scandals arise where creative accounting manifests itself, raises its head, and that's going to be a symptom of failure. Typically other non-financial signs. So where salaries are frozen, you may be delaying investing in capital, in equipment.

Your market share is declining. You may have high staff turnover. So, retaining and keeping staff becomes more of a battle. That is another symptom of failure. And then there are terminal signs. At the end of the failure process, the financial and non-financial science becomes so obvious that even the casual observer recognises them.

It's important to remember though, action can always be taken to reduce and mitigate the impact of business failure, and reducing the emotional and financial consequences attached to them. If you recognise that in your own business, the defects, the mistakes, or symptoms of failure, it's never too late to put them right.

If you want some support and help in moving that across and improving that, drop us a line. So, folks, this is episode 51 of the I Hate Numbers Podcast. I can't believe that we are going to be on one year anniversary, and I've loved doing this podcast from the day it started until now. We are looking forward to actually the next year and we're looking forward to week 52, and I'll announce in the show notes what we'd like to be talking about.

If you like the podcast or you've got some value on it, I'd love your feedback on that. Good or bad. Hopefully it's going to be good. Subscribe, share it with your friends and colleagues. Until next week, have a great week. We hope you enjoyed this episode and appreciate you taking the time to listen to the show.

We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.