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Before You Start, Know Why Businesses Fail. No discussion about what is required to be successful in business is complete without addressing the causes of business failure. In fact this is the first thing I researched when I first entered public practice. I investigated several studies that published and ranked various reasons for business failure, however, I concluded from my examination that these reasons, although described in terms of circumstances and events, could have been avoided had management had some reasonable foresight or made better decisions on a more timely basis. Of course the weakness of my analysis is that it involves hindsight and the Monday morning quarterback approach, however, my conclusions in 1988 were validated by a 1997 Statistics Canada study which attributes business failure largely to inexperienced management making incorrect decisions and\or "not seeing things coming". Despite the hindsight problem back in 1988, I thought the material in the studies sufficiently instructive if phrased as pitfalls to avoid, so I incorporated them in my first business startup checklist. Although I have since lost some of the original studies, I have found others that can be analyzed in similar fashion. For example, this "Study of Business Startups in Canada" was done by Decision Marketing Research Limited and released in 1988. They ranked and articulated the following reasons. Reasons For Business Failure 30% Couldn't make enough money at it 25% Difficult to market the product 22% Problems with financial backing 15% It was not what I wanted 8% Took a full time job 6% Personal reasons 6% Production problems 6% Problems with associates\distributors 5% Problems with manpower 5% Market too small 3% Problems with government 2% Too much competition Note this list is from the perspective of those who failed and suffers because underlying causes are not revealed. For example, taking the first two reasons, they could distill down to the following reason: overestimating sales potential, inability to motivate buyers, misjudgement of market wants\needs, product deficiencies, poor quality\performance, too complicated, no significant advantage, no follow through after initial effort, improper training of sales personnel, underestimation of costs, bad planning\no budget controls, improper timing, reaction from competition, technical\production problems etc. All of those reasons can be dealt with, assuming you first recognize a problem exists, then know what questions to ask. In fact the study did allude to this when they said that 66% of the survey participants said they needed help most in obtaining more and better information. Another study, done in the USA (my source has been lost so I suspect I took them from a news release), cited four main problems. These included a lack of vision and purpose, that is, no true "raison d'etre", a lack of key skills, talents and information, badly conceived and\or executed marketing or operating strategies, and improperly designed operating and\or financial information systems. Based on the above studies, my readings and experience, I have organized key circumstances and events that I believe contribute to business failure as financial and non financial factors. Financial factors include -excessive leverage or borrowed funds, -excessive overheads and breakeven\scale issues -inadequate cash flow due to decreasing sales and\or rising costs, -excessive management remuneration, and -excessive\unnecessary investment in other operating assets. Non financial factors include -lack of a strategic plan, -insufficient management depth, skills, experience, and know how, -a lack of relevant information of events\circumstances outside the firm, -the inability to compete effectively, -inadequate financial and operating controls, -poor choice of products, strategies, or tactics, -a commitment to decisions with insufficient resources and investment -unsupported investment in added space and capacity -expansion without thorough understanding of business and markets -expansion without experienced, skilled staff -insufficient re investment of profits -poor locations, facilities, technology, and -hiring inexperienced\incapable\unsuitable staff The lesson in all this is that it is all up to you. You control success and failure. To blame others, or circumstances beyond your control, is inappropriate in all but the rare case. It is your responsibility to obtain the the necessary knowledge and know how to structure and operate your business. You must recognize and mitigate negative events and circumstances and mitigate them before they become insurmountable problems. To do this you must be continually well informed about all critical aspects of your business. This includes the day to day operation of your business and you must also be aware of competitor activities, technical innovation in your industry, the needs of existing and potential customers, and all significant market and industry developments that will impact on how you do business. Surround yourself with staff and advisors who have the skills and experience you lack, and who have the skills and experience to maximize your chance of success. This is critical. You might need to pay a premium, but you will have a business that can afford it. © 2007 John B Voorpostel CA www.iaccountant.ca
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