Small Business Management MGMT5601 Topic 12: … · Small Business Management MGMT5601 Topic 12:...

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Small Business Management MGMT5601

Topic 12: Owner-Manager and the Troubled CompanyProfessor Tim Mazzarol – UWA Business School

UWA Business School MBA Program [email protected] MGMT5601



• Understand the causes of small business failure.

• Examine causes and danger signals of impending trouble.

• Understand the characteristics of poorly performing firms.

• Review turnaround strategies for small firms and apply the principles to a case study.

Learning outcomes


In this topic you should learn how to:


Nature and causes of small business failure

• Financial problems– Raising and using finance– Controlling cash flow– Budgeting and pricing

• Marketing problems– Identifying and developing new

markets– Commercialization of new products

• Production problems– Scheduling and purchasing controls– Controlling inventory and wastage

• Human resource problems– Organisation and delegation

• Problems with physical resources– Managing technological change– Poor use of information technology – High costs of buildings and equipment


The many deaths of small firms

Source: Cochran (1981)

Bankruptcy –Formal Failure

• Forced closure due to insolvency or legal crisis.

• Business will be required to compensate secured and unsecured creditors from available assets including those of the directors.

Failure

• Where firm is unable to continue trading due to financial or personal difficulties.

• May involve termination with loss to creditors or may see closure before bankruptcy becomes formal.

Discontinuances

• Where the owner-manager simply decides to terminate the firm and cease trading.

• Usually does not result in termination with monies owed to creditors.

Personal Failure

• A less public form of small business failure usually associated with failure “to make a go of it”.

• Often caused by burn out or high stress and owner-manager being unable to find a way out.


Bankruptcy and Insolvency


Common causes of failure in small firms

• Too much left to chance.• Too many decisions based on a hunch or

intuition.• Crucial obstacles go unnoticed for too long.• The amount of time and/or physical effort

demanded.• The amount of capital needed was either not

estimated or grossly underestimated.• Poor financial control and management.• Overtrading without adequate planning or

working capital.• Failure to seek external assistance when in

trouble.

Source: Mazzarol (2006)


Causes and danger signs of trouble

• Misunderstanding a market niche– Entering a new market without adequate market research and analysis resulting

in over stocking or over trading.• Mismanagement of supplier and customer relationships

– Upsetting key suppliers and lead customers due to poor or unethical practice.• Diversification into an unrelated business area

– Launching new products into new markets without undertaking appropriate risk assessments and planning.

• Mousetrap Myopia– Believing that a new product or service will do well without adequate market

testing.• The big project

– Over investing in a big opportunity without adequate risk analysis.• Lack of contingency planning

– Failure to undertake “what if” scenario planning and risk assessments.

Source: Timmons (1998)


Management issues likely to cause trouble

• Lack of management skills• Weak financial management skills• Turnover in key management

personnel• Inadequate focus on cash flows• Poor pricing – low margins• Poor debtor management• Lack of cash budgeting and

forecasting with key controls:– Bank reconciliation statement– Cash flow forecast– Debtor matrix– Creditor matrix

• Poor management reporting• Lack of standard costing• Poorly understood cost behaviour



Considerations for business survival

The Foreseeable• Ideas – how viable?• Resources – are they adequate?• Finance – sufficient cash flow?• Management – family and partner

problems or personal skills?

The Unforeseen• Economic downturns• Changes in key personnel• Failure of key customers or suppliers• Regulations and legal changes• Illness or family circumstances

Basic Systems Consolidation• Cash flow management and planning• Basic operations systems to control

utilisation and wastage• Profit and loss forecasting and budgeting

systems• Provision for liabilities (e.g. Tax payable)• Sales analysis and feedback systems• Selecting and using professional advisors



Signs a business may be at risk of insolvency

• Ongoing losses• Poor cash flow• Absence of a business plan• Incomplete financial records or poor accounts

management• Lack of cash-flow forecasts and budgets• Increasing debts (current liabilities exceed

current assets)• Problems selling stock or collecting debts• Unrecoverable loans to third parties• Creditor payments overdue• Receiving legal demands and threats• Suppliers refusing credit• Dishonoring of company cheques• Special arrangements with creditors• Overdraft limits reached or problems getting

bank loans or additional share equity• Overdue taxes and superannuation liabilities• Board level disputes or resignations• Hopes that ‘next’ big sale or job will save the

firmSource: ASIC (2008)


Dealing with a cash flow crisis


Principles of Re-engineering

• Organize around outcomes not tasks• Have those who use the output of the

process perform the process• Subsume information-processing work

into the real work that produces the information

• Treat geographically dispersed resources as though they were centralized

• Link parallel activities instead of integrating their results

• Put the decision point where the work is performed, and build control into the process

• Capture information once and at the source

Source: Hammer, (1990)


Principles of Turnaround Strategy

• Align the turnaround team around beliefs

• Start at the top and work with intact teams

• Create new experiences• Create the right kind of

experiences• Seek feedback constantly• Use an integrated process• Get everyone enrolled in the

change process• Create accountability for change• Troubleshoot the turnaround• Ensure formal systems

alignmentSource: (Connors & Smith, 1999)


Turnaround strategies for small firms

• Quick Cash– Unlock any sources of cash such

as stock or fixed assets that can be sold and/or leased back.

– Negotiate faster collection of receivables from debtors.

• Negotiate with lenders and trade creditors– Seek debtor financing from bank.– Negotiation of extended payment

terms with creditors.• Work Force Reductions

– Retrench employees or shift from full time to part time and casual employment status.



Lessons from a small business crisis


• Don’t get complacent– Never think is couldn’t happen to

me.• Make sure you have emergency

facilities in place before you need them.

• Loyalty to employees is great, but if you don’t cut soon you hurt everyone.

• If things really get bad put the bullet in early to save the company.

• Get customer and staff loyalty early– Goodwill built up in the years prior

to the crisis will pay dividends when the time comes.

• It’s never as bad as it looks.


An integrated problem solving process

Problem Finding Initial

Statement

Fact Finding

Cause and Effect Analysis

The Problem Statement

Creative Idea Generation

Idea Screening Implementation plan

Innovation



Key performance measures in retailing

• A well managed retail business will establish clear standards for:– how it uses floor space, – the sales targets for each

salesperson in relation to this floor space,

– customer complaint levels and – measures for stock control,

theft and breakage.


Key performance measures in services

• A well-managed service business will have:– a clear standard for

measuring how many productive hours are available,

– the actual hours used to complete a job compared to the quote for that job,

– how much re-work is required and

– any materials consumed in the job.


Key performance measures in manufacturing

• A well-managed manufacturer will have clear standards to measure:– its use of staff and equipment,– materials consumed and– the number of acceptable

rejects.• The owners of well-run

businesses control their operations rather than have their operations control them. – They set clear standards and

measure how they perform against these.

– They meet quality standards and minimize waste.

INADEQUATEDEBTOR CONTROL?EXCESS

STOCK?

EXCESSWITHDRAWALS?

UNDERCAPITALISED?

INADEQUATECREDITORTERMS/CONTROL?

EXCESS INFIXED ASSETS?

BANKPROBLEMS?

TURNOVER?

MARGINS?(PRICES)

PRODUCT COSTSAND CONTRIBUTIONS?

OVERHEADCOSTS?

MATERIALCOSTS?

LABOUR COSTS?DEPARTMENTALCOSTS AND CONTRIBUTIONS?

CASH OR PROFIT PROBLEMS?

CASH PROBLEMS?

PROFIT PROBLEMS?

Source: DUBS 1992

PRODUCTION PROBLEM SOLVING - A FRAMEWORK

BELOW STANDARDUTILISATION? BELOW STANDARD

EFFICIENCY?

BELOWSTANDARD

PERFORMANCE

C A U S I N G

C A U S I N G

C A U S I N G

C A U S I N G

IMBALANCE INPROCESS CAPABILITY

POOR LAYOUT INADEQUATE LABOURSKILLS (TRAINING)

INADEQUATEFINAL PRODUCTSTOCK TAKE/OFF

INADEQUATESUPERVISION

INADEQUATE ORINAPPROPRIATEREWARD SYSTEMS

EXCESSABSENTEEISM

POOR LABOURFLEXIBILITY

FREQUENT CHANGESIN PRODUCT MIX

HIGH MACHINEBREAKDOWN RATE

OUT OF DATETECHNOLOGY

POOR MATERIALS(COMPONENT QUALITY)

POOR HEALTHAND SAFETY

FLUCTUATIONSIN ORDERS

INADEQUATEPRODUCTIONPLANNING

POOR STOCKCONTROL

LOW MORALE

MATERIALSSUPPLY PROBLEMS

POOR MATERIALSHANDLING

BELOW STANDARDQUALITY

EXCESS WASTAGE(ABOVE STANDARD)

Source: DUBS 1992


Case study: Robotics Pty Ltd


• Prepare a problem statement for Robert and Claire that summarises the main cause(s) of the difficulties that Robotics Pty Ltd has found itself confronted by and explain why you have identified these as the main issues to be confronted.

• Prepare a list of the key things that Robert and Claire should consider when developing a turnaround strategy for Robotics.

End of Presentation

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