A few years ago, I worked for a management consultant named Joe Chojnacki. Joe established his practice in 1979, well before there was the plethora of information that exists today to help small business owners succeed, and well before there were many management consultants focused on helping small business owners.
Joe amassed an extensive library of articles and books on the topic of small business management, and today’s post is a summary of an article that appeared in the March 1982 edition of the Small Business Report. I think this publication has gone out of business, but if anyone knows if it still exists, please let me know the website and address so I can make them available. This is the first of four posts that will summarize the contents of the article.
Studies cite the following factors as the major causes of business failure:Â financial pitfalls; excessive optimism; inability to change; rapid growth; improper organizational structure; failure to delegate; lack of succession planning; poor management systems;inability to recognize what business the company is in; and an inadequate board of directors.
FINANCIAL PITFALLS – Typically, financial failure is blamed on insufficient capital. This is more often the case with new companies. Established companies’ financial pitfalls are in other areas: dependence on debt, inadequate financial planning, improper cash management, emphasis being placed on sales volume rather than profit and ROI, miscalculation of the risk-return trade-off, underdeveloped bank relations, excessively liberal credit policies, poor billing systems, and mismanagement of payables.
Another financial pitfall is the underestimation of outside economic variables. Many companies, particularly those with high fixed costs, are greatly affected by outside economic conditions, especially during recessionary periods. The higher the percentage of fixed costs, the more vulnerable a company is. Only those firms with a large degree of variable costs can adequately reduce expenditures when business slows. Management must be aware of the effect on fixed costs and profitablity during slow economic periods.
Finally, many business managers forget that the purpose of being in business is to make a real profit, not an accounting profit. A deficit is a deficit, no matter how you disguise it. Realize and accept that unless the surplus of current revenues over costs takes into account the cost of capital at current market rates, you are, in fact, operating at a loss. The cost of capital is the minimum cost of staying in business.
EXCESSIVE OPTIMISM – If you fail to recognize early warnings of potential major problems and thus fail to deal with the problems, you will soon have a full fledged disaster on your hands. Excessive optimists never have backup plans in the event of problems in production, sales, or collections. Then, when things don’t go exactly as planned, they are left unprepared to cope with adversity.
You can avoid this trap by always considering three possible outcomes when making plans: optimistic, realistic and pessimistic. All major proposals should contain answers to two critical questions: (1) How long can the company survive if everything goes wrong? and (2) what alternative courses of action are available? If you can answer these questions, you will be prepared for changes before they occur.
Next Post – Inability to Change and Rapid Growth