How to combat business failures
| Pages | 178-184 |
| Date | 01 April 2005 |
| Published date | 01 April 2005 |
| DOI | https://doi.org/10.1108/13590790510624891 |
| Author | Mohammed B. Hemraj |
| Subject Matter | Accounting & finance |
Journal of Financial Crime Ð Vol. 12 No. 2
How to Combat Business Failures
Mohammed B. Hemraj
INTRODUCTION
The causes of business failures, which have an adverse
repercussion on proprietors and their families, range
from banks lending to unviable projects, to inexper-
ienced borrowers, borrowers using short-term bor-
rowing for medium or long-term ®nancial needs of
their business, borrowers not being in the right
market at the right time and business not generating
enough pro®ts to repay the borrowed money with
interest. The aim of this paper is to analyse, from
reported cases, the causes of business failure and
what lessons can be learnt so as to prevent such occur-
rences in future. All the factors mentioned which may
lead to business failures are important and need to be
recti®ed in time for the business to survive, prosper
and grow. However, the two most important
factors identi®ed by the author for business success
are the viability of the business venture and the pro-
prietor exploring the availability of various ®nancial
packages to satisfy their business needs from dierent
providers. Solely relying on temporary bank over-
drafts is not the only option.
The paper is divided into two parts; the ®rst part
examines in general terms issues regarding risk man-
agement and ®nancial management and the second
part takes a case study approach and documents
issues, gaps and con¯icts with regard to risks associated
with lending to property developers.
RISK MANAGEMENT AND FINANCIAL
MANAGEMENT
Risk management
In carrying on a business a proprietor faces various
risks associated with running the business. Calculated
risks may be acceptable, in which a proprietor goes
into a business with eyes wide open to all those foresee-
able events which would have impact on the business
and for which allowances must be made Ð accepting
blind risk is undesirable. These foreseeable events
which may later prove problematic to the business
consist of competition in the market place, bad
debts, failure in procuring raw materials (in the case
of a manufacturing company) and for others goods
and services in time, wage in¯ation and (last but not
least) increases in borrowing costs.
Insuring risks
The business owner will ®rst have to make advance
provisions through appropriate insurances against
those events which are insurable.
1
Although these
events may never actually occur, insurance will
ensure the business proprietor will not be caught by
surprise. There are ®nancial packages available in the
marketplace to suit every type of business but their
costs dier. The aim of the owner should be to
obtain the most suitable and least expensive ®nancing
package for the business.
2
This requires familiarity
with and proper understanding of the various types
of ®nances available.
Financial management Ð preliminary
issues
Salaried employment versus self-
employment
Becoming a business proprietor as opposed to being in
salaried employment has its advantages and disadvan-
tages. Long hours, changes in demand, short supply of
raw materials or the main supplier going bankrupt and
major debtor disappearing are some of the disasters
and risks associated with running a business. The
advantages of self-employment are that the proprietor
becomes his own boss, which brings prestige, chal-
lenges, and high earnings (entitlement to the whole
of the business pro®t). The disadvantages of salaried
employment are a ®xed income, boredom and no
security of tenure. The advantages, however, are a
®xed weekly or monthly income irrespective of
how the business is performing, with paid leave and
a company pension. The lender ought to point these
advantages and disadvantages out to those who want
to leave secure employment in which the potential
borrower has expertise compared with setting up a
business where there may be little or no expertise
and/or capital
3
and which may be doomed to failure.
The size of the business
Lenders have also to be careful and deter those who
want to undertake over-ambitious projects and wish
Page 178
Journalof Financial Crime
Vol.12,No. 2, 2004,pp.178±184
#HenryStewart Publications
ISSN1359-0790
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