Unsurprisingly the most common question I get asked is why businesses become insolvent. Although I could give an extremely long winded answer, more often than not it is usually very simple. No it’s not that they have poor service or a bad product, but frequently because directors believe business decisions have less risk associated with them than if they were put into a different environment.
An analogy I use when running my own business is to imagine the same decision in a household context i.e. can you afford that new piece of machinery on finance? Can you afford a ride on lawnmower on a credit card? Both may mean an increase in output after purchase, but are they really affordable and will continue to be economical in the long term?
It seems a simple mistake but ask yourself if you can really afford it? Give yourself some serious time to think about this question. If you have to think about the answer, even for a split second, then go and do some more homework on it.
It extends to wider issues as well; one of the largest mistakes I see is directors committing to contracts that are just too big for the company as a whole. That gleaming contract that could get the company to start competing with the big boys; was it ever going to be completed to a high standard? or were you just setting yourself up for a fall? Would you promise to pick the kids up from school, get home from work, do the washing, hoovering and shopping all between 4 & 5pm but still expect to succeed? No matter what was promised, if you can’t meet an order don’t do it.
These issues are becoming increasingly common in recent months, especially as contracts shrank during the recession but are bouncing back with confidence in the last few quarters. Remember to not be lured by fool’s gold, take a step back and look at it from a third person perspective.