Business Failure, The 8 Traps Causing Failure And The One Attribute
Which Ensures Business Survival
By Kelvyn Peters
Editor's Summary: Poor management and poor money sense are the number one reasons why businesses fail within the first twelve months of opening their doors. Learn how neglecting to write a business plan, and not recognizing a very real need for experience can lead to business failure. Read about the other six traps presented in this article.
It is estimated that 78% of all small business start-ups fail within the first twelve months years, and long-term survival is likely for only 22% of all new business start-ups.
At the same time huge corporations with seemly vibrant trade suddenly close their doors.
Why is this so?
An analysis of the reasons for business failure suggests that over 60% of all business failure is due to poor management practices.
The one attribute which must exist in every firm The only rule to survival is that money in must be greater than money out. We often forget this. Too many entrepreneurs think that extra cash will solve almost every problem. Good management - not money - is the key to a business flourishing or dying.
Does this mean that the old saying about using other people’s money is wrong? No! But the money coming in each year must be greater than the money going out for expenses, owners’ private expenses and the costs of servicing loans. Profit is vital to a business but cash is king.
No cash no business
Learning management skills
There are two very good ways for small business owners to learn management skills.
One is to find out what the “high-fliers” in your industry do, and do the same! Perhaps then you will become a “high-flier” too!
Another is to study the mistakes of others. We have identified those often made by business owners.
The following are the 8 traps which cause business failures.
Trap 1- Discounting the need for experience
If there is one thing that distinguishes big business management from small business management, it is that the owner/manager must be the chief cook and bottle washer in a small business whereas each of the different facets of a business such as accounting, marketing, purchasing, research, training and sales, has a specialist who is responsible for them in large firms.
Seldom does one person have an in-depth knowledge or experience in all management disciplines. So the businessman who has a real skill in only one or two needs to be strengthened by knowledge in the others.
The best Chef in Australia will find it hard to succeed in business for himself if he has no skills in marketing or financial matters.
One solution is to get some training in operating a small business before you start; Colleges now have good programs for the intending new purchaser.
The owner should review her own weak points. The gaps can then be closed by a crash self-development program, getting some knowing partners or staff, or by hiring outside consultants.
Trap 2 - Sloppy Bookkeeping
New operators often ask the question-What books should we keep? The question invites a short and concise answer. But it is the wrong question and the accountant who answers does disservice to his client.
The question is not-“What should we keep?”- but “What do I need to know?” The correct books meticulously kept are useless if the proprietor makes no use of the information they convey.
A poor record keeping system leads to serious problems in every aspect of the business from advertising to sales, from stock control to taxes.
A record keeping system should be easy to maintain and regularly kept to provide current information quickly.
The appropriate records will tell you a lot of things about your business that you will need to know! If it doesn’t you need to change it. Information unused is worthless information and a waste of time.
Trap 3 – Spending more than you receive
One of the most dangerous pieces of information that traditional accountants give is a ‘breakeven figure’ which tells you the level of sales which is just sufficient to pay expenses. But what good is that if the business is your only income producer? How will the business survive if you can’t pay the rent on your home or make mortgage payments or pay school fees?
A more meaningful figure is the sales required to produce the necessary cash to pay all your living expenses and your taxes.
Many proprietors don’t know that a growing business requires more and more capital to support it. Even if a doubling of sales does not require an increase in staff or equipment, it does require an increase in stock and debtors.
In most small enterprises this can only come from profits. It is seldom that the money in the bank today is completely available for spending today.
Often a shortage of cash is a symptom of other problems with the business, so your first move should be to your accountant.
Trap 4 - Failing to Plan
Failing to plan is the single most common management trap among struggling business owners! Planning is very important for ‘Big Business’, but it is vital for the small firm because it hasn’t the resources to cope with any mistakes as does the large organisation.
Developing plans for your business isn’t easy - only necessary! We often hear the plea, ‘But it is impossible to accurately predict the sales in this business!’ And often they are right too!
But it isn’t necessary to be accurate in predictions and estimations if you monitor and adjust as you go. Nor are figures as important as the trends. So absolute accuracy isn’t necessary. A poorly prepared plan well maintained and adjusted as you go is a thousand times better then no plan.
Trap 5 - Dilly Dallying
The typical small business proprietor has too much to do. Surveys suggest that most small business owners work a sixty-hour week with some regularly doing over seventy. Does this sound like anyone to you know? So busy are they that they haven’t time for trivial matters and all time is spent on vital matters dealing with business management-right?- Wrong!
A trap for the unwary is to allow the business to run the proprietor instead of the proprietor running the business. Sometimes this a symptom of poor planning, but often owners fritter away their time on trivial matters doing insignificant tasks which staff should do while vital jobs are left undone.
A safeguard against this is to ask yourself several times a day ‘Is this the most productive thing I could be doing right now?’ And do the most productive task right now.
Trap 6 - Poor Marketing
The first priority of every business is to get and keep customers. No matter how good the service; no matter how excellent the product; nothing happens unless you have customers.
‘The best advertising is word-of-mouth’ is a maxim that has harmed more businesses than any other truism. It’s not because it’s untrue, word-of-mouth is probably the best advertising. After all, it is free, it is believable and it works. But too often it is used as an excuse for having no marketing at all.
So even if an enterprise adopts word-of-mouth advertising as its preferred marketing strategy, it should formulate a plan to stimulate its customers to talk to their friends. What if it isn’t bringing in new customers at a fast enough rate to remain profitable? I see so many clients who buy coffee shops and then sit back and wait for customers. You can’t grow that way.
When you get down to the basics, marketing is fairly simple really. You need to know exactly what features your product has and benefits your customers derive from those features. You need to know what sort of people your existing customers are, and then explore how to present you product/service to the same sort of people.
Whatever your business is, you should strive to make it ‘different’ in some way. No two restaurants should be identical even if offering the same cuisine. Be independent and innovative in what you do and offer something different-even if it is in the quality or personal service. Give customers a reason to come to your restaurant instead of the one up the road.
Take the time to explore ways of increasing the number of customers. Sales seldom increase without some effort, and a business standing still with no new customers is a business beginning to die.
Trap 7 - Poor employee Management
Despite their good reputation for employer/employee relationships, small businesses often mishandle staff. Small business proprietors continually complain of the poor staff on offer. They complain of employees not taking direction, being unenthusiastic at work, taking sickies and long lunch and tea breaks.
Disgruntled workers are poor performers who chase customers away. Yet it has been proven that the cause of most of these problems is not the poor quality of the staff offering themselves for jobs, but inept staff management.
Very few small business proprietors have formalized training programs for their staff. Nor is the typical small business owner particularly skilled in hiring the right staff. If the employee who is hired does not have the necessary skills when hired, then lack of suitable on-the-job training ensures that she will never acquire it.
Another problem for the small business owner is that because the closeness with which he works with his staff he becomes so friendly with them that he lacks the necessary assertiveness to create a happy, co-operate environment in which quality service is given.
In most cases of failing firms there is a low or complete lack of morale.
So check the morale of your staff. If you think poorly of them, it’s odds on that they think poorly of you. Do something about it because low morale is another sign of a failing business.
Trap 8 - Assuming the proper role
Why is it that one restaurant succeeds and grows while another with similar service, location and capital just doesn’t get off first base? Usually the difference is in the skills of the owner.
The skills required change as the business changes. We all know about the chef who prospered while he spent most of his time in the kitchen doing what he did best. His troubles started only when the business grew to the extent that he needed to be out of the kitchen so much that he needed to employ other chefs and kitchen staff.
While he was doing everything, he could easily keep all the things he needed to know in his head. Now he can’t, and the records have not been put in place so that he know what’s going on.
He forever lurches from one crisis to another, from one angry supplier to another, from one dissatisfied customer to another, from one angry employee to another. His business is doomed if he doesn’t realise that his role has changed.
The beginning business needs an operator. Someone who can get his hands dirty and perform any of the functions that are required. As the business grows the owner can be a chef no longer but needs to assume the role of manager. Paperwork has multiplied, staff and equipment have increased and the role of the top man has been made more complicated. Failure at this stage to grasp the new role may mean the failure of the business, too! The owner can be a chef no longer!
It is difficult for the small business owner to know when each stage of his business has been reached and the business may never reach the transition stage because he fails to allow it.
This is the reason small business owners must be careful in their choice of accountant. If his accountant merely produces tax returns each year without advising on the health of the business-then the owner is alone, indeed!
Contact Kelvyn Peters CPA & Associates. You just need a little help, you will find it at http://profitstrategies4business.com
Kelvyn Peters is one of Australia's longest serving Tax Agents. Kelvyn was registered in February 1962.
He is a director of Restaurant Catering Qld Inc the peak employer representative in Queensland, and advised the hospitality industry for many years.
His speciality is moving in to rescue ailing restaurants.
Kelvyn Peters CPA has spent over 20 years experimenting and researching methods to help small business in meaningful ways that are affordable.
Kelvyn and his associates have perfected it with their local clients now they are going global. http://www.profitstrategies4business.com