A few months ago it was suggested here that, without some economic recovery, many more businesses would go to the wall. And so it has come to pass – not the economic recovery, but the collapse of more marketing agencies.
Business failure can be attributed to a variety of causes, but the bottom line is that the companies run out of cash. That’s either because they start with too little capital, or they don’t generate enough income, or they spend too much delivering the goods. And the likelihood that more cash will go out than come in over any period of time is the fundamental risk that every entrepreneur takes when venturing into business.
So why do companies still persist in being under-capitalised? Why did the Media Shop management buyout team use the company’s own cash to pay off the previous owners when inevitably that would weaken its balance sheet? Why did Jonathan Stead withdraw £2.9 million from Rapier soon after his partner John Townshend had left the company?
If people businesses like marketing agencies run up against hard times it is almost certain to be the one occasion when their banks will decline to assist. So the only prudent way to ensure the capital base is solid enough to sustain the business through that period is for the owners to put or keep a lot of money in its coffers. That may be as much as between three and six months’ operating costs – enough to allow the wages to be paid while the management takes whatever remedial action is necessary.
One can understand why an entrepreneur who has invested years of energy in building up an agency feels that any profit or cash sitting seemingly unused in the business would be better relocated into his or her private bank account rather than risk losing it. But that misses the point. Business is about risk as well as reward. Risks can only be taken, and rewards can only be extracted, if the business has a sufficiently strong capital base to withstand the consequences. It’s a simple lesson, but one that too many entrepreneurs seem to ignore.
Sustainability must take precedence over self.
Bob Willott is editor of “Marketing Services Financial Intelligence”