Business Failure is Often Self-Inflicted

It is better to stop something bad from happening than it is to deal with it after it has happened.  And so it is with business failure.

If you know there are problems coming up in your business, you can do something about them.  That is a much simpler and cleaner solution than trying to tidy up the mess of a failed business.

I know – a long time ago I had to step in and try and save the family business.  It was very disheartening to hear the Bank Manager say, “You’re doing everything right, but you are two years to late!”  118 years of trading down the gurgler, and a mess it was.  Partly it was due to a business model whose time had passed, but it also was a lack of the right information.

You need to see the threats coming to your business to take evasive action.  That means illuminating the possible problems and creating insight into your business with good financial, productivity, efficiency and risk information.

Without good records that can’t be done, but there is one more imperative.  Unused information is of no benefit.  It must be analysed to determine what is happening in the business, what are the trends, what are the warning signs, are you looking for the danger signals.  To see the threats, and the opportunities you must analyse the information.  Business failure is often self-inflicted.

Having analysed the information. it needs to be documented.  Reports must be written.  It is only in actually writing the reports are owners and management likely to consider the implications of their information.

You know that yourself.  Simply looking at a set of accounts, customer conversion rates and all your other KPIs does not make allow proper consideration.  It gets put aside while you get on with the next thing.  Having to write up the reports provides that consideration.
That is why I require my clients to develop a reporting template and write their report regularly.  We meet to discuss their findings when I’m mentoring or coaching them.

So many "business" owners simply have a very low paying job because they don’t take this basic step.  Many initially regard reporting as a pain in the posterior, but as they grow in their business and develop their understanding of their role as a manager and entrepreneur, and not just the Supreme Technician in their business, they embrace the concept.

Many studies on why small businesses fail attribute failure to things such as an inability to manage costs, inefficient ineffective and inexperienced business management, poorly designed business models or no business plan, insufficient capital, poor or insufficient marketing, failure to seek professional advice.  And these are certainly factors.

In one study, 70% trusted their "gut instinct" over any professional advice.  It is all very well to trust your gut instinct in your area of technical expertise, but less sound in an area in which you don’t have experience.

The Australian Securities and Investments Commission said in 2011 that too much failure is self-inflicted.

In fact, “poor economic conditions” was not at the top of 13 possible causes of business failure across five industries on which ASIC reported.  “Poor financial control including lack of records” and “poor strategic management of business” came much higher as causes of business failure in the construction, services, retail, accommodation and food, and manufacturing industries.

This reference to ‘poor financial control’ is important.  Despite the fact that I found only one other reference nominating insufficient time managing the books as an important factor, lack of visibility is a crucial factor.  But it is not just financial information that needs reporting on.

It is all the other factors whose outcomes are reflected in the financial information; productivity, efficiency, markets, risk.

Tony Featherstone, in reporting on the above ASIC study, said “The takeout from this analysis is simple: if you want to avoid business failure, focus first on strategy.  Implement strong financial controls and record keeping and keep a close watch on cash.  That sounds like obvious advice, yet too many small business owners I know do not have detailed strategies.  They often have poor records and weak cash flow controls.” 

I find it passingly strange that, in discussions of why business fail while all the usual reasons are paraded; lack of a business plan, lack of finance, lack of management skills, lack of a market, or marketing, poor business models and so on, little weight seems to be given to measuring what was pivotal in their business.  And those who don't measure, also don't analyse and report. 

Making good decisions requires good information, then analysing and using that information.  Making decisions on gut feeling and instincts is all very well, but you are far less likely to make the right decisions.  Facts require a good information system providing accurate and timely information.

People are likely to make poor decisions without accurate and timely information that has been analysed and reported.  And too many poor decisions will lead to business failure.  

Experience has taught me that a business owner or manager must have accurate information upon which to make decisions.  That means having the right KPIs for your business, and they must be analysed and handled correctly for any small business to not just survive but be profitable and provide you with the freedom you deserve.

Jonathan Byrnes, in “Islands of Profit in a Sea of Red Ink” suggests:

  • Nearly 40 percent of every company is unprofitable… by any measure.
  • 20 to 30 percent of every company is so profitable that it provides all the reported earnings — and subsidizes the losses — of the entire business.
  • Most current business metrics and control systems (budgets, etc.) do not even show the problem, or the opportunity for improvement.
  • Most of the unprofitable and marginal business can be turned around using the three key elements of profitability management: profit mapping, profit levers, and a profitability management process.

This can only happen if these businesses are not measuring the right things, and reporting on them.

Have a business.   Don’t self-inflict failure and dig your own grave. 

Are you inflicting failure on your business?

When clients approach me for coaching, clients with businesses that are underperforming despite the crippling hours and effort the owner is putting into them, they are sometimes held back by lack of knowledge of what is happening in their business.  A lack of focus of potential improvements leads to a lack of control over their business, and eight times out of ten that lack of control comes down to a lack of knowledge of what is happening in the business, and what their peers are achieving.

For more than 29 years I’ve been helping small business owners plug the profit leaks in their business and restoring their cash flows by assisting them understand where and how they may change their business to be a leader in profitability, productivity, and competitive advantage.  I assist you analyse:
•    The strengths, weaknesses opportunities and threats of your business
•    Determine where you want to be – clear, achievable goals, and
•    How you are going to get there – strategies to achieve your goals

This is sometimes known as the NOW – WHERE – HOW model.

If you would like to discuss with me how you might do that, book a Strategy Consult here. 

© Copyright 2013 Adam Gordon, The Profits Leak Detective


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