Various sources put business failure rates between 50% in the first 3 years and 90% in
the first five years. While the precise figures are open to challenge, the underlying fact is that far too many
businesses fail and each failure brings along with it much emotional, financial, and personal hardship to many people. In
about 50% of failures, the triggering cause of failure is non-availability of cash usually resulting from poor cash management.
Many other factors contribute
as well.
A cursory examination of business failures shows that most of them result from
sub-optimal management in a number of different areas. The failure areas most often cited are:
Planning and management mistakes
Insufficient planning
Taking bad advice from unqualified people
Unrealistic expectations
Underestimated time and work requirements
Funding / Cash management
Under-capitalization
Insufficient line of credit
Cash management
Receivables (A/R) management
Payables (A/P) management
Cost controls
Marketing & Sales
Pricing policies
Inadequate attention to developing new customers
Niche market dries up or disappears
None of this knowledge is new; these factors have been public knowledge for a long
time. Many who seek to learn from them and create bulwarks against failure have
studied them extensively. For example,
the key to successful cash management is diligent attention to cash on hand and
monitoring and managing Accounts Receivable and Accounts Payable. Business managers must track each customer’s
payment history and ensure payment receipt within an acceptable period from the invoice date. There are a number of
well-known techniques for encouraging prompt payment. Management must also negotiate the best possible terms when
signing on with a new supplier or vendor.
Many supporting tools also exist. An example of a tool that helps management to monitor cash levels is
a simple spreadsheet that summarizes by week, over the next few weeks (or months depending on the
payment cycle normal to the industry,) the total expected income, expense, and the projected cash balance. This draws
management’s attention to weeks where there could be insufficient cash on hand in time for preventive action. Remember,
it is much easier getting a bank loan when you do not need the money than whenyou do.
Each of the other major failure areas is also well studied and there is extensive
literature on problem prevention and cure. Given this vast repertoire of knowledge, the observed high business
failure rates are rather surprising. The prescribed corrective techniques do correct the problems when applied properly
and in time. They have repeatedly been tested and found to work.
Most entrepreneurs have a burning desire to succeed and such a strong belief in
themselves and the products or services they offer that they do not reallyconsider the possibility of failure. Yet
most businesses shut their doors within five years. They start off fully committed to do what it takes to ensure success and most put in long
hours. However, the fact remains thatfar too many fail in spite of these efforts.
Why then this discrepancy between expectation and observed fact? Could it be possible that the problems being
studied and touted as being causes are merely the symptoms of underlying causes? Recommended cures based on them are similar
to trying to heal major trauma by putting band-aids on the injury long after the damage has been done.
My experience has taught me this discrepancy actually results from an excessive attention to measurable and quantifiable
facts while ignoring “soft” data that is difficult or impossible to measure or quantify.
It is much easier working with quantifiable data and building a logical process based on it. Soft data, subject to subjective bias, is
easily challenged and much more difficult to explain and “sell.”
However, careful attention to such soft data is essential to making substantial and
sustainable improvement in business profitability and viability. There is good reason to believe that a large
percentage, if not most, business failures result from a failure on the part ofthe owner to realign his/her thinking and
behaviour with the management needsof the business.
It appears the key to success is enhancing the leverage provided by these well-known
and time-tested management techniques by using and applying “soft” skills. While we explicitly address new
entrepreneurs, the points made are equally applicable to businesses of any size or age.
Let us first look at traits common to most entrepreneurs. Most entrepreneurs are
people who are good, often excellent, at their skill or profession. They are hard working and
dedicated, like doing a good job, and are willing to go the extra mile to make sure their output is of the best quality.
They are often tired of working for others, and want to keep more oftheir earnings for themselves. They are strong-minded and dedicated, know what
they want to achieve, are willing to work hard and put in the long hours neededto get their business off to a good start… but …
Why then do they fail? What could they do differently to armor plate their businesses against failure? Entrepreneurs
have the traits needed for success. Why the high rate of failure? Could it be the very traits needed for success can, if applied incorrectly or in excess,
lead to failure?
Let us examine how these misapplied or misdirected traits lead to failure, and how
avoiding them by doing the correct thing at the correct time can Armor Plate the business against failure. However,
before we do so, let us touch on the main failure areas and discuss what theentrepreneur can do before launching the business.
At the beginning stage the three most important things to do are – Planning, Planning,
and Planning. The entrepreneur must plan for all foreseeable contingencies, ensure sufficient capital in reserve, and
–most important of all – undertake a self-examination to determine skills that are lacking and those needing augmentation. Advice
from unqualified people can be the kiss of death to the business. No matter how close a friend is, if he/she has no experience in the
subject matter ignore the advice. Find a qualified person or consultant to help you if you have no one to draw on. Money
spent here has a tremendous return on investment (ROI.)
After the planning and funding comes the actual start up of the business. At first, the entrepreneur may run a “one man
shop” doing everything from creating/producing the service and products to selling them and keeping records. Eventually,
they hire others to help with getting things done.
Many entrepreneurs now need to learn how to teach their employees to get necessary tasks done properly. Most new employees
will initially be unable to turn out as fine a job as the entrepreneur, who is now the “Boss,” can. When seeing a less than
perfect result, the “Boss” needs to avoid jumping in and doing the job (as in “if you want a job done well, do it yourself.”)
Instead, the boss needs to transfer job knowledge and skills, and teach the employee how best to achieve the desired result.
As the Boss learns to delegate and teach, he/she will find more time to get other important things done.
After teaching the employees how to get their tasks done right, the next critical problem area lies in delegation and authorization.
A Boss who cannot or will not delegate and authorize finds him/herself so inundated with decisions to be made and work to
get done that he/she has no time to do the things that only a Boss can do such as leading and guiding the enterprise.
The Boss must learn how to grant the requisite authority and then hold the employee responsible for delivering results of the desired quality within
specified cost and time requirements. Remember, delegation and authorization without holding the employee responsible is abdication in disguise.
Another essential aspect of delegation and authorization is that the Boss can only
delegate responsibility for specific tasks; responsibility for guiding the enterprise and delivering the desired profits and success is always the Boss’
responsibility. The Boss can never delegate ultimate responsibility for the enterprise’s success.
As the Boss learns to teach and transfer knowledge, delegate and authorize, other needs and desired skills come to the forefront.
The Boss now needs to learn how to coordinate and synchronize employee efforts to the best advantage. He/she needs to optimize at the enterprise level.
For example, instead of demanding arbitrary levels of quality (above what the customer needs and is paying for,) the Boss must
also attend to things like deadlines for delivery and cost optimization to maximize profits. Remember, spending time and resources on
improving quality beyond the customer’s needs and requirements is a waste of time and resources.
TheBoss will now find that he/she needs to automate certain repetitive aspects of management. One example is pricing a bid
for work. Most bids involve some combination of already established data to compute a bid price. Bidding too high can lose the job, bidding
too low leaves money on the table. An easy next step is creating business models that allow the Boss and his senior
employees to merely plug numbers into a model and determine a price that fits needs. Optimal stock ordering is another easily automated task that can
have a major impact on profits.
These models serve as “decision support tools,” they cannot make a final decision but the support the Boss in making a “good”
decision by eliminating most of the drudgery involved. They also make it easier to delegate tasks to employees as
they provide a built-in mechanism to prevent bad decisions and help the employee get up to speed faster.
Such decision support tools play an increasing important role as the enterprise grows and more people have to make decisions.
They standardize the process and automate most of it so that the Boss only has to attend to exceptional cases.
Money invested in buying such tools or hiring a qualified consultant to create them is money well spent.
As the enterprise grows and gets more profitable, the Boss needs to overcome one final hurdle. This is the most critical
one of them all:
The Boss must learn to work “on” the business instead of “in” it.
In other words, the Boss needs to switch attention from a particular skill or function to the needs of the business as a whole.
The Boss must not fall into the trap of focusing only on interesting things while delegating total responsibility and
authority for uninteresting aspects of the enterprise to others. Remember, this type of activity is not delegation – it is abdication.
Abdicating ownership of any facet of the enterprise to any one else invites trouble. Even when done in the best
of faith, decisions taken in such a manner may not support those taken elsewhere in the enterprise, leading to wasted time, resources, and lost
profits. At the worst, such situations invite fraud and other forms of chicanery. The Boss must always be involved and kept informed in every aspect of
the business.
In summary, there are number of things an entrepreneur must do to ensure success. There are many checklists of
things to do, and items to be checked off on each. All these are important and must be done. However, paying careful attention to “soft skills” and
applying them conscientiously will help armor plate an enterprise and protect it from all but a “direct hit.”
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