How to Prevent Business Failure

by Tom Egelhoff

This is a continuation of a previous article called, Small Business Failure: Three Reasons Why Your Business Will Fail And How To Avoid Them." If you are a new business or a home based business, you should read that article first and then continue on with this one.

What Do The Numbers Say?

Any good accountant will tell you that they can look at your books and tell you why your business is failing. "Your sales are down, that's why you aren't making any money." The accountant can tell you where to look but you must find what to look at.

For example, OK, sales are down. What is the cause? Customer service? Are customers getting "WOW" type service? Product selection? Do customers have an acceptable level of choices? Suppliers? Are your suppliers able to provide materials in a timely manner? As you can see, there may be many causes for problems within your business. So how do you spot potential problems and what can you do about them.

Measure Your Business

The real value of a good accountant or in-house bookkeeping is to measure what's happening in your business. If you were to think of your business as an automobile, you might divide the car into sections. Body, electrical, fuel, engine, drive train, tires and interior. The equivalent of your mechanic saying, "I think the problems in the engine", is the same as the accountant saying, "I think the problem is in sales."

The engine is very complicated and is comprised of many parts. So are sales. Each part must be examined and eliminated as the cause of the problem. Mechanics and accountants do diagnostic checks. They measure how your business is operating against known norms. When they find deviations from those norms these are the problems of your business.

What Are Some Of The Known Causes Of Business Failure?

Do you realize only one business in five is still in existence after five years? Will you be the one or the five? Here are some common reasons for business failure and what to do about them, in no particular order:

The business runs out of money before it can produce a profit on its own. This happens all too often. One rule to keep in mind. Your business checkbook is "off-limits" for your personal bills and expenses. That money does not exist for your use until well after you have reached the break-even level. See: "How To Grow Your Business To The Break-Even Level."

Investing capital in too many long term investments. Many businesses require large outlays of cash for equipment. Contractors, for example, need back-hoes, bulldozers, etc. to be competitive. These items take time to pay off. One bad month can put you hopelessly behind with no chance of recovery. Answer: Rent is possible, even from your competitors. They can't afford to let machinery set idle. A partial hourly rate is better than no hourly rate.

Failure to make accurate financial projections. How much will it cost to keep the doors open? In order to survive, you must make x sales per day at a profit of x dollars. Can you do it? In addition, there is the unknown. Businesses sometimes change from month to month. Often there is no way of forecasting these changes. Some months are going to be better than others due to a variety of influences. Unfortunately, many business owners find this out the hard way. Create a projection with every possible disaster included. Late payments, late deliveries, more competition, anything that can happen will happen.

Poor site selection. "If you build it they will come." With the boom in the Internet this isn't quite as important as it once was. I know of several businesses here in Montana that have closed their doors and now do all their business on the Internet. Most of the time the wrong question is asked. Instead of, "How much site can I afford?", you should be asking, "How much traffic can this site generate?"
Failure to establish a "relationship" with a banker. Sooner or later, if your business survives, you are going to need to borrow money. Here in Bozeman, we only have one locally owned bank. All the others are "chain banks." Loans decisions are made somewhere else by someone who doesn't know you. Small towns often have "home-town" banks who will work with you if you'll let them. Form and build a relationship with these banks. Actually, the banks should be the ones doing this but most won't.
Mis-use of credit. New small business owners try to capture market share by buying the business by giving extended credit terms to customers. This will build traffic but will also seriously deplete your capital. Number one above says you should have at least six months of operating capital before you open your doors.

Not doing your homework. As a mechanic, you may know cars inside and out. But, do you know how to handle inventory, schedule time, the legal way to hire and fire employees, purchase supplies, handle payroll or the hundred other things every small business owner should know? If not start learning BEFORE you start your business. Set up an imaginary business. Purchase supplies, write imaginary checks, schedule jobs, etc. See what happens. It might surprise you.

The Last Word On Preventing Business Failure

Owning a business becomes one of two things. Either you have a fun, viable business or you've bought a job. Successful business owners, in my opinion, learn their business. Yes, they have accounts and bookkeepers that keep track of the money, but, they also know how to prepare and read an income statement, how to prepare a profit and loss statement.

In a word, they've learned the language of business finance. You should too. Get a basic accounting book, take some adult ed classes and learn this language.

Microsoft, Proctor & Gamble, McDonald's, IBM and Apple Computers all visit this site on a regular basis. Why? To get my pearls of wisdom? Maybe, but I believe they come because the secret of their success is to explore what's going on out there. To constantly search for new ideas and new concepts that keeps them at the top of their respective industries.

They don't get caught by surprise when markets change. They do their homework. Learn from them and do yours. Be the one, not the five.

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