According to the Small Business Administration 45,000
businesses close every month. Declining consumer spending, massive
layoffs, credit constraints and foreclosures are only part of the reasons
that have contributed to the number of business failures, closures and
bankruptcies that have occurred and are expected to continue into next
year and perhaps the following years.
Accountants and business consultants tell us that
there is five reasons businesses fail.
revenue; lost income and a declining customer base may be due to
circumstances beyond a businesses control, such as the current economic
climate. But it can also be attributable to other factors, such as
pricing, location, declining market share, slow or non-paying customers.
issues; the majority of start up's by nature may not possess or
employ the proper balance between ownership and management skills. When
internal management is insufficient, the effects generally are reflected
on the bottom line.
capital; all businesses must have sufficient working capital.
Accountants say a business should have a balance sheet to support three to
six months of payroll and fixed expenses, to maintain a cushion for any
unforeseen loss or crisis.
conditions; history reflects
that the most common causes of business failure is related to economic
conditions outside the control of business.
debt issues; many businesses for too long have relied on access to
easy credit in the forms of lines of credit, loans and home equity lines
of credit to finance their businesses. Small to mid-size businesses are
now struggling as a result of tighter lending, high-rate credit cards,
reduced lines of credit and maturing loans.
Any of these reasons can wreck havoc on a business.
However, from the credit professionals' perspective the two primary
reasons a business fails are poor management and economic conditions.
The good news about managerial shortcomings is that
management has control over them and they can be corrected. The bad news
is that management will sometime overlook these shortcomings and find
fault elsewhere never admitting that they were to blame for the failure of
the business. Some of the key reasons for business failure related to
Poor cash flow management or the understanding of
Under capitalization; no business plan or lack of a
well developed business plan;
Being overly optimistic about sales and the time and
effort required to be successful;
Inadequate pricing or failing to maintain adequate
Over expansion; growing too quickly before
identifying sales trends;
Lack of experience in the industry they are doing
Poor marketing and promotion;
Poor business location;
Too much reliance on one customer or industry;
Poor managerial experience: including not following
the business plan, weak internal controls, poor execution, hiring the
wrong people, poor delegation skills, poor communication skills,
ineffective time management.
Economic conditions are usually something that is
beyond managements' control. Good management practices, however, can
permit management to respond to those opportunities and challenges that
the economy, good or bad, is constantly presenting.
Good management is always aware of the following:
The unemployment rate of experienced salaried and
hourly workers - when this unemployment rate is high, business failures
Interest rates - when interest rates go up business
failures historically have increased after 2 to 3 years;
Gross domestic product - when the GDP is high,
business failures decrease.
The after tax profits for manufacturing companies.
When profits go up for manufacturing companies, business failures go down.
Other issues to follow are changes in government
regulations, changes in international trade, education and the weather.
Today we work in the era of big government and
business. As individuals we have become subject to these giants. More
often than not we cannot even comprehend all that goes into making them
what they are. They employ regulations and rules that call for uniformity,
standardization, and the reduction of all independent thought and action
to a set of formulas. In many organizations this is known as "company
policy". In government we call it "politics".
For example: How many recall the story about the
Union Pacific coal train operating between Sharon Springs and Salina
Kansas? A few miles after
departing Sharon Springs a wheel bearing on one of the coal cars became
overheated and began melting. This caused a metal support to come loose
and grind on the rail. It caused white-hot molten metal to spew onto the
railroad track and ties. Fortunately, the train crew noticed the smoke
halfway back in the train and immediately stopped the train in compliance
with company policy. Unfortunately, when the train came to a complete stop
the coal car, with the hot wheel, was sitting on a wood bridge that was
built with creosote ties and trusses. The crew immediately called the
company dispatcher and after explaining their situation and was ordered
not to move the train because government regulations prohibited operating
a burning vehicle and company policy prohibited moving the train with a
defective part. So, because of
company policy and government regulations the train crew waited for the
fire department and watched while the bridge, the railroad tracks and the
train burned. Later the National Transportation Safety Board and company
investigators ruled the accident was the fault of the train crew for
stopping the train in such a manner that the defective coal car ended up
on the wood bridge.
Big business often survives difficult periods because
rather than admit their mistakes they look to the government to bail them
out. Small and mid-size businesses, in order to survive economic
downturns, must always be aware of the strategic risks posed by changing
From our perspective the number one reason why most
businesses fail (all sizes) is because they either did not recognize the
need for transition or they failed to manage the transition.
Business leaders are constantly reminded that they
need to change to stay competitive. Change is a constant and although I
have written countless articles about change and counseled clients about
change and have received positive feed back from readers and clients
expressing their need to implement changes, the fact is when I have
followed up and asked how the changes has affected their operation the
most common response is the changes never took place.
The business environment is not stable, it seldom is,
and that is a reality of being in business. There are different reasons
for every downturn in the business cycle, but the consequences stay the
same. A business has to adjust and adapt to survive in both a good and bad
economy. This means management has to know not only what changes need to
be implemented but also how to manage the transition.
There is a universal misconception about change. The
majority maintains that change requires strong leadership, a strategic
plan and good information. While leadership, strategic planning and
information is important, they are only a component of business success.
We know companies with great leadership who had a
detailed strategic plan supported by reliable information and yet they
failed. And, they failed because they believed:
Change is about having a plan
Change is about saying you are going to change
Change is about having current information
Well, that's not what change is about.
Real change is about doing something. It's not the
failure to identify change that hurts organizations. It's the failure to
implement change that hurts organizations. And implementing change
The difference between change and transition is
similar to the difference between collecting past due accounts receivable
and implementing a credit policy that is enforced. Collecting past due
accounts receivable will immediately improve cash flow (collecting past
due receivables represents change in the collection process). Implementing
and enforcing a company credit policy (the transition) will not only
result in reducing past due accounts receivable but will provide a
continued benefit to the organization. It is much more difficult to
transition than it is to change.
We knew of a company who was having difficulty
implementing its strategic plan. The executive team did an excellent job
identifying the key points in the plan and communicating it to department
management. However a year after the plan had been presented to all,
little progress had been made and the executive team was naturally
Nothing happened because making pronouncements about
the need to change and how change will create results did nothing for this
organization because there was no follow through. After all the
announcements were made and meetings were concluded everyone went back to
their daily activities. Everyone assumed someone else was handling the
transition and no one made any effort to change what his or her department
was doing because no one had instructed them to.
There are two types of management, strategic and
operational. It's important that we look beyond strategy when presented
with a business downturn or new opportunity. Strategy will help us to
identify the direction we should move in. But, if we want to successfully
move our organization in that direction then we have to transition the
strategic plan to an operational one and that requires us to address
employee concerns and uncertainties.
Employees are generally not adverse to change if they
understand not only the reasons for the change but also how they will be
affected by the change. Too often senior management fails to include
anyone outside the management ranks in the reasons for the changes they
are making and expect rank and file to follow and adjust to the changes
2010 has been a disaster not only because of the
obvious reasons but also because many changes have been implemented
without a well thought out plan but instead a knee-jerk reaction to
circumstances that were previously ignored by government, business and the
Business has sliced and diced the ranks of its’
number one asset leaving a demoralized and scared work force to deal with
a crisis they do not fully understand. In 2011 the U.S. government plans
to adopt the methods used by business over the last two years. First,
freezing wages and then downsizing the government payroll.
Our leaders, in both business and government, have
either forgotten or ignored the words of the successful entrepreneur Ross
Perot who said, “You cannot
commit the troops until you first have their support”.
Leaders whether they are in business or government
need to not only effectively communicate their plans but also obtain the
support for those plans by fully informing their employees how they will
be affected by the results. This will result in a successful transition
from strategy to operations and minimize failure.
If we fail to effectively transition then any
recovery effort attempted by change to the way we presently operate will
be less successful then planned and that will lead to businesses and
government entities continuing to utilize the bankruptcy code and that
will only prolong the recovery process.
I wish you well.
The information provided above is for
educational purposes only and not provided as legal advice. Legal advice
should be obtained from a licensed attorney in good standing with the Bar
Association and preferably Board Certified in either Creditor Rights or