The family business – Years 1-5

Posted: September 22, 2013 in Family Businesses
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I will attempt to break down the chronology of the family business into easily understood chunks. A family business that either starts out as a corporation or a proprietorship, needs to be able to survive the first five years financially. The Canadian Federation of Independent Business (CFIB) posted a chilling statistic that (as of 2009): over 50% of all businesses fail within the first 5 years of start-up. So, the first order of business is – to stay in business!

The family business usually starts out small, and overheads are not out of line. A lot of administrative tasks are performed by a spouse, usually without compensation. This isn’t a bad things as there is the realization that unnecessary overheads must be controlled.

The goal is to not only show a profit within the first five years but to make the profitability recur on a year-over-year basis. Usually staff that are hired are hired as direct revenue generators. This is okay as well.

It has been my experience that financial reporting is not on a monthly or even a quarterly basis. It is usually on an annual basis as part of the year end income tax reporting calendar. Some family businesses play “catch-up” by getting all of their financial records ready for the external accountant and fail to take corrective action on a monthly basis. This is a serious oversight.

The well being of the business is determined by its bank position. The business has piles of vendor bills and a list of customers to collect receivables from but, a financial accounting software package is looked upon as an unnecessary expense or something that is too difficult to understand.

Cash flow management can be difficult. Statutory remittances for payroll and sales tax can be missed and then – the problems begin.

Yet, it has been my experience that a lot of family businesses survive longer than they should using this approach.

Then what?

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