It sounds simplistic, but having a solid financial foundation is essential if a pest management business is to thrive.
Why do businesses fail? What is it that causes the hopes and aspirations of so many pest management owners and managers to be dashed?
Having spent nearly a third of my career in this industry helping pest management operations with their finances, and as a former director of the University of New England’s Financial Management Research Centre, I understand the pitfalls that can cause a business to crumble.
Numerous studies I’ve read on the failure rate of small and large businesses show that 90% of these can be attributed to “poor management”. But what actually constitutes poor management? There are many reasons why businesses fail, but there are a number of key areas that appear in every survey:
- Poor inventory management
- Poor credit control
- Inadequate accounting and inadequate management information systems
- Cash flow crisis
- Poor control of GP margins, sales volume and expenses
- Excessive drawings, wages or dividends
- Excessive investment in fixed assets
- Unplanned financial structure.
Let’s look at these in more detail in the context of a pest management business.
Many pest management businesses are doomed almost before they start. They begin with extremely shaky capital foundations, and before long they stall without having had the chance to succeed. A feasibility plan and a profit and loss budget linked with a cash flow plan, must be undertaken before committing one dollar in launching a business.
Poor inventory management
Many pest management businesses fail to properly determine what equipment they should purchase and how much inventory they should hold and what kind. Start ups should only invest in the essential equipment and buy inventory on an as needs basis. Growing companies should take a close look at equipment utilisation and inventory management. Proper planning would mean less cash wasted on useless equipment and much needed funds going back into more important areas of the business.
Poor credit control
In the rush for sales and to build up good relations, many owners and managers are lax in controlling their debtor’s accounts. They extend credit to new customers or fail to chase up commercial clients who are perennially late paying their bills. This can force the pest management business to become a slow payer itself, potentially damaging its own reputation with its suppliers. It takes just one large account going bad to sink a business.
Poor accounting and inadequate management information systems
“If only I had known about the situation earlier!” is an all too common statement from failed owners and managers. Inadequate and untimely record keeping, bank reconciliations and review of financial statements are not done on a timely basis, meaning the business is flying blind – a recipe for disaster.
Cash flow crisis
An increase in the level of sales usually means greater inventory holdings and more credit granted. If the operation grows rapidly, the resulting increase in inventory and in particular debtor levels, can cause a cash crisis known as “overtrading” – growing at a rate faster than the cash resources will allow. The paradoxical result is that the business may be more profitable, but if there are no additional funds to invest in the business, it risks bankruptcy.
Poor control of gross profit margin, sales volume and expenses
At the heart of any pest management operation is the fundamental relationship between expenses, sales volume and gross profit margin. Expenses are allowed to grow to the point they cannot be covered by the profit margin on sales. Margins are often squeezed by trying to compete on price alone. There is usually no idea of the breakeven level of sales at which costs are covered and the operation makes a profit.
Excessive drawings or wages and dividends
A very common mistake made by people who have gone into business for themselves is to draw too much from the business by way of wages, entertainment expenses, cars, boats or other extravagances. They watch the cash coming in and want all the perks – the safest bet is to invest profits back into the business for that inevitable rainy day.
Excessive investment in fixed assets
Another pitfall for newcomers is initially investing too much in vehicles, equipment, premises and facilities and choosing state of the art. The problem with investing too much in fixed assets is that cash outflows increase, meaning the operation has to sell even more services to cover these additional costs.
Unplanned financial structure
This is where owners and managers don’t plan their funding requirements well in advance. If extra funds are available, they tend to be in the wrong form. The basic financing mistake is to use short term funds for long term purposes or borrowing too much – referred to as over gearing. Remember, each extra dollar borrowed means less control over your destiny.
Peter Cox, Peter M Cox & Associates