Most people start off their lists of business failure with businesses being undercapitalized. Unfortunately that communicates that money can solve everything. It cannot. It also doesn’t get to the core components that speak to the likelihood of success in bootstrapping the business or the likelihood of obtaining credit or investment. Therefore you will see that my list takes a different look at the problem of success/failure.
I’ve been in the business risk assessment business for over 34 years. I know it well, having financed over 3,000 businesses and managing a portfolio of over a billion dollars of small business loans. Clearly, things go wrong in all businesses. The single most important point is whether or not management has their eyes open, watching risk and has contingency plans. I hope you do not find yourself in the risk categories below:
1. The number one reason businesses fail to thrive is that the principals do not understand the risk of the business and therefore are not watching. Think of a cruise ship sailing without navigation charts … or without someone at the helm. Imbedded in this reason is also the situation where management does not know enough about their business and does not align themselves with people who can help them. This includes engineer business owners who do not know accounting and other knowledge based flaws.
2. The number two reason businesses fail to thrive is lack of focus and clarity of Mission, Vision and Values. Employees can get distracted with their own priorities, likes and dislikes. Whereas clear Mission, Vision and Values combined with laser focus on objectives that are tied to them makes it easy to know where the ship is sailing and how to get it there.
3. The number three reason businesses fail to thrive is that they have either too much structure or too little. Many businesses are started by people who cross over from successful corporate industry. These individuals often implement procedures and processes that worked well in their old jobs. Unfortunately the old job was with a company that might have been mature in their industry, while the new company needs to be entrepreneurial. If they do understand business lifecycles, they might forget to implement structure as they grow. Successful entrepreneurs understand business lifecycles and the need to match structure with their lifecycle stage. This is one of my consulting specialties where I have taught CEOs to be more effective and productive.
4. The fourth reason is that management creates too much capacity in the form of their plant, qualified labor (thought to be irreplaceable) and other fixed overhead. When sales become volatile, the overhead absorbs the profit, and often one of these elements is responsible for a loss or business failure. Outsourcing manufacturing can lessen the risk of this element. Over the last few years, many businesses did not shrink fast enough. Luckily many businesses ultimately did reduce capacity. Shrinkage actually creates cash flow. Unfortunately, when their management wants to grow again, they will find that they do not have the balance sheet support to find the financing that they once had.
5. The fifth most common reason is that they grow too fast and do not have the capital to traverse the growth curve. Basically, they have too much money tied up in inventory and receivables. This is the traditional “undercapitalized” business. Banks allow a certain amount of leverage. If your business outstrips a bank’s pallet for risk, alternative financiers such as Factors or Asset Based Lenders are available to lend to support accounts receivable growth.
6. The sixth reason is they build something that isn’t really wanted in the marketplace, or at least not at the price that it can be profitably delivered. Too many people believe in “build it and they will come”.
7. The seventh reason relates to the long term price support given competitive forces (elasticity of demand). This really breaks down into two things, pricing and competition. We’ll start with competition. Competition includes alternative methods of solving the core issue that are resolved by the product. Too often management ignores the alternatives that our customers have. One must look at all the alternatives when one is evaluating how to price one’s products. Your customers will certainly look at alternatives.
8. The eighth area of general business risk is theft (internal as well as external). Theft and fraud are interesting topics. It is appropriate to design systems and processes to keep honest people honest. Moreover, one must keep an eye on key financial indicators to be alert. It seems that thieves are always coming up with new ways to sneak under the radar. One must keep one’s radar diligent, flexible and current.
9. People management is the next area where productivity is harmed, thereby causing issues with operating margins. The foundation of management is to have clearly understood Mission, Vision and Values. Once established, decisions must remain consistent with this foundation. Follow through, communication, respect and appropriate rewards must be valued by management.
10. The last issue on my top ten list spans both start-ups and traditional businesses. I like to refer to it as Murphy lives! Whenever something can go wrong it will. This especially includes things taking longer than one wants them to, or projects them to take. My best advice is to always have a back up plan and know that things take longer than you want them to.
OK, so there you have it. If you have any of these attributes/issues, give me a call. Once you are aware of the attribute/issue, you may be poised to solve it yourself. You may need the assistance of a Certified Management Consultant that specializes in the area of concern. In any event, subject to availability, I’m happy to have a conversation on your issue, provide you with support including an introduction to a consultant or financier.
Bob Stackhouse, President, Asset Commercial Credit
© Bob Stackhouse – All rights reserved – January 2014