SME Toolkit Logo
Partner Logo
 Share  Print Version  Email

Year 5 - Recipe for Disaster

Provided by the International Finance Corporation


We can see how Amira’s business has grown. The tools she is using indicate that she understands that herself and the business are different entities. Neither the budget nor her cash flow forecast contains personal income or expenses. At this point she truly feels like she is in business, instead of someone who has a hobby and makes a little money from it. The only way is up for Amira, or is it…?

Let’s find out how her business is doing in year five. She has been successful. Her business has grown every year, and she has many happy clients.

To recap, Amira is a fabulous designer of furniture and soft furnishings. She personally checks the quality of every product she sells as well as providing a personal consulting service for her best clients. She has a fantastic reputation in the city she is based in. Life is good. She is making lots of money and is becoming quite well known with the rich and famous.

She has an idea to expand. She wants to sell her products nationwide. She gets investors to finance the expansion. She finds suppliers and skilled workers. She devises a clever marketing campaign, offering discounts and interest free credit to new customers.

Launch day arrives and everything goes perfectly. Customer numbers are better than expected, and production has to be increased to meet demand.

Amira should be very pleased, right? So why can’t she sleep at night? And why will her whole business fail within 12 months?

Some more relevant information about Amira. Put a tick mark against the traits you recognise in yourself.

  • She is passionate about her work.
  • She refuses to compromise on quality.
  • She’s not really interested in money, she just wants to make her business the best.
  • She hates saying no to a customer.
  • She wants to be personally involved in all parts of her business.

Behind the scenes…

  • The increased production meant that she had to buy more raw materials than she originally planned for.
  • She had to rent an additional storage unit to keep the raw materials, which she had not planned for.
  • Her skilled staff had to be paid overtime to meet the demand, which was also not expected.
  • All the new customers took advantage of the discounts and generous credit terms, which meant they were allowed to pay in instalments over twelve months, interest free.

The result…

  • More cash going out than expected, but only a small amount coming in every month.
  • The cost of the products increased due to the overtime and additional storage, but the price paid by new customers was reduced under the new marketing campaign.

Things were looking tricky for Amira. But her investors were prepared for it, and she was able to secure the additional funding she needed to cover the additional costs.

But...

  • The strain on her production facility began to affect the quality of the finished products.
  • Amira was now trying to personally oversee two production facilities and work with a much larger customer base, all while attempting to provide personal consulting services to her biggest clients.
  • Her mother fell sick, and she suddenly found herself with another load of responsibilities.

And then…

  • She soon found herself unable to do all the things she felt she had to do personally. There just weren’t enough hours in a day.
  • Her existing customers began to complain because they didn’t get the discounts new customers received, and started to look elsewhere.
  • Some of the new customers began to return the products they had bought, citing quality issues and refusing to pay.
  • The workers in the new factory went on strike to demand higher wages because of the pressure they were under to maintain high levels of production.

Finally…

  • With a shrinking customer base and striking workers, Amira found it impossible to borrow more money to keep the business afloat until all the new customers had paid for their purchases.
  • Her suppliers began to worry that they might never get paid. Some took her to court.
  • She delayed making tax payments and made loan repayments later than agreed to, in order to free up some cash.
  • Her investors saw what was happening and decided to ask for their money back immediately, as they had a right to do under the financing agreement Amira had signed.
  • To pay off some of her debts, she was forced to sell all her stock of raw materials and finished goods at a fraction of their value.
  • She was also forced to sell the rights to the future income from customers for much less than they would actually pay.
  • In short, her business was finished.

So…

  • even though she knew she had great products and services that people wanted,
  • even though she knew she was the very best furniture designer in the whole country,
  • even though she knew there was enough money still to come from customers to pay for everything and still leave her with a healthy profit,
  • her businesses was failing.

Did Amina’s story have an inevitable ending? Clearly there are always many factors involved in any business, but knowing businesses numbers is often the key to making better decisions and thus making sure it doesn’t end up like Amira’s. Being aware of your businesses financial position is also essential when trying to secure finance for growth and investment.

<BACK TO AMIRA'S STORY MAIN PAGE

<BACK TO YEAR 1 - START-UP

<BACK TO YEARS 2 AND 3 - BUDGETING AND CASH FLOW

>GO TO YEAR 6 - THE FUTURE IS BRIGHT

Copyright © 2000 - 2017, International Finance Corporation. All Rights Reserved.

© International Finance Corporation [Year of First Publication].  All rights reserved.
2121 Pennsylvania Avenue, N.W.
Washington, D.C. 20433
Internet:  www.ifc.org
 
The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law.  IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or  liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon

2121 Pennsylvania Avenue, N.W., Washington, D.C. 20433, www.ifc.org

The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law.  IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or  liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon.

 Share  Print Version  Email