V.B. Prabhu Verlekar discusses various challenges to businesses that could uproot their existence. He also suggests
solutions to ensure that businesses do not run astray and lose their mojo
Many family-run business enterprises, whether small or big, having made a promising start and achieved initial success, fail to grow and flourish and enter into a state of stagnation. This is despite them possessing tremendous potential and availability of ample opportunities. Many enterprises have failed by the time the second generation has taken over the reins of the business. There are a good number of examples in Goa itself where enterprises have hit roadblocks and are now riddled with disputes within the family and stakeholders as well as litigations, both internal and external, some of which are even reported in local newspapers.
A brief study reveals that there are some common causes for such underperformance, stagnation and failure that
fits into the profile of any business. If one can spot them at the right time, steps could be taken to get the business back on track.
1. Failure to delegate and no succession planning
First generation entrepreneurs who have cultivated their business successfully as a result of their passion and hard work often don’t display confidence in the abilities of their children. They continue to micro-manage the business even after the business has grown to a stage where micro-managing hampers business growth. As a result, the focus shifts to minor and irrelevant issues and the outlook for business shrinks. The trust in the capacity of their own children or employees collapses. Gradually, the motivation to explore new horizons is lost. For business growth, children and employees should be trained in every aspect of the business through systematic planning. They should be empowered with authority to take decisions and at the same time they should be laden with complete responsibility to back their decisions, even if they fail or the decisions appear to be wrong in hindsight. Succession planning is essential for business continuity. The entrepreneurs should get the work done through delegation and supervision. The roles, duties and responsibilities of each family member in the business should be defined along with a commensurate remuneration. For this to be effectively done, the entrepreneur should hold short meetings on a regular basis with specific pre-determined written agenda. Decisions and issues discussed in previous meetings should be followed-up persistently till they are resolved and closed. Also, the entrepreneur should spend time in
exploring new opportunities and look out for potential threats in this volatile, uncertain, unpredictable, complex and ambiguous world. To keep pace with times, one should encourage expansion of existing business as well as new
ventures to meet aspirations of growing family clan. To manage the inevitable, the entrepreneur should do succession planning with a carefully thought out “Will”, which is equitable and fair to the heirs. This would instill a sense of confidence, security and ownership in the second generation. Identifying and bestowing leadership roles to potential members would provide transitional continuity to the second generation after the baton has been passed on by the founder.
2. Tax evasion and unethical practices
Whenever a business grows, the profits swell and significant amount of payments are required to pay income tax, GST and other taxes/compliances. There is a temptation and tendency to evade these taxes by taking recourse to unfair practices of inflating expenses, suppressing cash sales, inflating project costs by diverting funds, buying unproductive assets like luxury cars to claim higher depreciation, charging personal expenses to business and such other unethical acts. Such acts may provide a short-term saving or thrill to the entrepreneur and boost his social
standing. But in reality, these practices result in a great damage to their business growth by affecting the financial health of the enterprise. The transactions make their balance sheets, which is primary document to avail credit facilities from financial institutions, appear weak. It presents an ugly picture of the business. Their entire balancing and control system of liquidity and inventory goes for a toss. The employees too, start losing respect and their motivation to work for business growth diminishes. On the darker side, this also encourages staff to be dishonest
and cheat the business without any remorse seeing dishonesty of the owners in such unethical practices. Customer
service gets affected as a consequence of the effect on the employees. Black money generated leads to luxurious and
wasteful lifestyle for the family members, especially the second generation, and makes them unfit to face any challenges of business in the mistaken belief that earning money is easy.
3. Lack of focus on cash flows
A major cause of failure of business is not understanding the importance of positive cash flows. Cash is the life blood of business. If it dries, the business collapses like a pack of cards. The Covid-19 pandemic has made us realise the importance of having reserve cash flows. Cash flow is affected when short term funds are used for payment of long term assets, which results in delay in payment of staff salaries, creditors, bank instalments and interest payments in
time. Non-payment of government dues like income tax, GST and other levies can result in penalties and heavy interest and blocking of bank accounts. Non-payment of salaries on time demoralises the staff affecting their work. Heavy personal expenditure from business resources is another major drain on the cash flow. Some owners are focused only on the turnover and market share. They look up to e-commerce giants like Flipkart and Amazon and think that if they achieve very high turnover, the rest will fall in place automatically and funds will appear magically. This is sadly often a misguided notion. Owners should look for cash profit and not just reporting book profits. For this, they should plan their activities properly and concentrate on collections. Cash is needed to operate a business successfully otherwise disaster is waiting to happen. Remember that in today’s times even valuations are done based on projected cash flows and not book profits.
4. Poor investment in knowledge and competent staff
Everything moves at a tremendous pace in the world today. Unless your organization keeps pace with these changes and adapts to change, your business is bound to fail. Owners splurge business resources lavishly on holidays and luxury cars. However, there is hardly any provision made in the budget to invest in improving knowledge of the owners and their employees at all levels on a regular basis to improve and upgrade their skills and knowledge to keep
up with the latest changes that are taking place in taxation, technology, human resource management, fund management and amongst competitors. This results in stagnation of the business and stagnation of the entrepreneurial spirit. One should not aim at cost cutting when it comes to gaining knowledge or employing good employees. To achieve constant updation, owners and their staff should regularly participate in seminars, workshops and study relevant educational courses. They should also have mentors and professionals to guide them from time to time if they wish to remain at the top. Engage highly competent and quality staff and pay them well so that they do not leave you. Employees should feel proud of their organization for ethical practices and reputation. This is a major
motivation factor for them and can accelerate the growth of the business.
The Columnist is a senior Chartered Accountant and has authored many books on accounting and taxation. Email: verlekar@bsnl.in
