Is the insolvency of your business a failure?

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business failureLike old buildings that are decaying or no longer fit for use, businesses often need to be pulled down and rebuilt. Should this be regarded as failure or renewal?
There are three definitions of failure in the Cambridge Dictionary:
Someone or something not succeeding;
Not doing something that you must do or are expected to do;
Something not working or stopping working as well as it should.
Much has been written about the role of directors and how it contributes to the failure of a business but less about the lessons that can be learnt and how they contribute to the future success of entrepreneurs.
Failure is something the business writer and chairman of Risk Capital Partners, Luke Johnson, has written about and must have had further cause to reflect on following his injection of £20 million into Patisserie Valerie, which recently announced that it was in danger of imminent collapse after what may turn out to have been the subject of accounting and auditing irregularities that are currently being investigated.  Johnson was one of the company’s founders and main investors and it is perhaps no surprise that his blogsite and website that cover matters such as prudent financial management and spotting fraud have both been offline since the announcement.

Contributors to business insolvency

The potential causes of a business becoming insolvent are many but the most common is simply running out of cash which can be the result persistent losses, non-payment by customers, over trading and the consequential inability to meet liabilities. These are often attributed to the economy, market conditions and increased competition but essentially derive from decisions by directors or more specifically indecision by directors.
Changes in market conditions, or indeed in the wider economy, are arguably outside the control of the directors, although even here, it could be argued that they should have seen these coming and taken steps to protect it by focusing on shoring up profitability and cash flow.
However, the essential point is that any business failure is down to the actions or non-actions and the mindset of the directors.
How? Here are some human traits:
A lack of reality: this might be down to over optimistic assumptions, over confidence or excessive hubris. This can lead to insolvency following a failure to monitor the situation and take the necessary action to make appropriate changes.
Other, equally understandable and human emotions that can lead to inaction by directors are guilt and shame about their business being in financial difficulties.
Business restructuring advisers often cite these factors as the reason why they are called in too late, since all too often the situation has escalated beyond one which they believe can be recovered.

Where is the blame for failure?

Failure of systems and processes: a good example is the tracking of invoicing and payment processes to protect a business from late-paying customers.  If a business does not have robust systems in place and key people to monitor and act on them, it can quickly find itself in financial trouble.
Failure to carry out sufficiently regular reviews of Management Accounts or to identify warning signs of something going wrong:  this is something I have covered in depth in other blogs but essentially without a regular review of such elements as cash flow, profit and loss and success in meeting targets management will potentially miss early warning signs of something amiss and therefore fail to take appropriate action.
Failure of cash and credit management including debt collection, over trading and non-payment by clients.
These are some of the factors that are attributed as the causes or reasons for an insolvency but ultimately it is down to directors as the decision makers.
Insolvency, I would argue, is therefore a consequence of poor judgement and decision making.
However, this is how we as humans learn, indeed the only people who don’t fail are those who don’t try. Failure is necessary for us to make progress. The only issue is whether we heed and learn from our past decisions and from those of others.