Why Businesses Fail

by Guest Blogger Michael Harrison

Small and medium business owners not only support the Australian economy, they grow it, improving all our lives. A new business in Sydney creates jobs, pays taxes, improves the local economy and adds to the country’s GDP (where do you think those employees spend?).

Small and medium business is the future here today. It’s where innovation leads to wealth creation, and an improved standard of living for millions of employees. When a small business starts showing a profit we all benefit.

Conversely, when a business tanks and displays the OUT OF BUSINESS sign on the front door, investors lose, employees lose, the visionaries with the next great idea lose – we all lose the benefits of a robust economy when a growing company goes down for the third time.

It was there on Tuesday. What happened?

The company was under-capitalised.

Of all the business challenges I encounter, under-capitalisation is, perhaps, the most common. It’s certainly a challenge that can bring down a company – even a well-established business that’s been around for generations.

Under-capitalisation is a challenge that must be addressed before you throw the switch to open the business’ doors. You can fill in some of the costs, i.e. the cost of leases for your projected company’s needs, or number of employees with salary and benefit costs nailed down.

You can fill in the cost of power, raw materials, shipping, work space, fixtures, equipment – you can fill in a lot of blanks to arrive at the number you need to start the business, or expand the company to improve the bottom line quarter after quarter.

However, you can’t always control the business environment. You can add a second office (and associated expenses) in another city just before a “deep pockets” competitor opens an outlet right down the road. Didn’t see it coming, didn’t plan for it, because you can’t predict the unpredictable.

You open a new business, a restaurant, just as the national economy takes a downturn and people cut back on personal expenses – like dinner in your restaurant.

You can’t predict all contingencies. That’s why you not only need enough capital to take the next business step; you need a contingency fund to keep open the doors if Plan A doesn’t fly.

Run your numbers under a variety of scenarios. Then, choose the worst scenario as your map to business success. Prepare for the worst and then some! It keeps you running and growing smartly.

Company management didn’t have a plan.

This is a very common challenge many small businesses face. Some grow. Some don’t.

Before you undertake a business expansion strategy, create a business plan with detailed descriptions of the business’ goals and objectives, the need for capital, how capital will be used. Creating a business plan forces company managers to assign costs to each new innovation.

Company management failed to identify the risks in change.

In this inter-connected, global economy, companies must be nimble to adapt to new industry best practices, new technology, new outsourcing companies that can do it for less, new economic trends, perhaps (nationally and globally for companies conducting business across 24 time zones). Business owners who fail to accurately identify and quantify the risk inherent in change often find themselves with fewer options for expansion.

Change within a business always involves risk because you can’t predict the future with any real certainty. Is the new corporate structure the best? What metrics will be used to measure “success?” How’s the labour market within your service area?

Business changes are opportunities. They’re also minefields if changes hurt business. Analyse the risks inherent in planned changes. What’s the worst that can happen?

You want to know. Then, you want to know how to mitigate risk through strategic business planning that drives the company to meet your business goals – faster, and more productively.

The company managers didn’t have a Plan B.

Very common, even in the largest companies. Management develops a plan. When the plan is implemented it fails to deliver desired outcomes.

At this point, time and money have been invested in this plan without delivering the projected results. Okay, as I mentioned, plan for the worst case when developing a business strategy.

Then, develop Plan B – the steps the company will take if the initial strategy fails to deliver.

So, whether you’re writing the company business plan at the kitchen table, or meeting with the company’s Board of Directors to discuss a major acquisition, the same principles apply.

Do you have the capital, a well-conceived business model, a considered risk assessment, a long-term plan to grow the business, and a back up in case your rose-coloured vision turns out to be a mirage?

Why do businesses fail? If you don’t know where your business is going, any road will take you there.

And that’s a dangerous way to grow a business.

 

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