Shut it Down or Turn it Around?
Failure – A Scary Possibility
Although owning a small business can be your greatest reward in life, it can also be your biggest failure. The statistics for owning a small business are startling. Only four percent of all businesses survive long term. One million businesses are started each year and 80 percent of those businesses close their doors within the first 10 years. Within the next 20 years, 90 percent of the remaining 20 percent of businesses will shut their doors. This means that only 20,000 (out of a million) businesses survive more than 30 years.
Second generation business owners often make the mistake of thinking that they can continue to do things “the way they’ve always been done” in order to maintain their predecessor’s success. But 70 percent of the time, this assumption is incorrect and the second generation business results in failure. In fact, it is very rare for second generation businesses to survive long term.
This year alone over 100,000 businesses will go bankrupt while countless others will simply close their doors. Unfortunately, most business owners do not see tragedy coming until it is too late. By the time many business owners realize how serious their financial problems are, they simply cannot move fast enough to salvage their hopes for survival.
The three major reasons for business failure are:
- Sales declining below costs for extended periods of time.
- Cost control and productivity not reaching profitability.
- Cash running out and loans or equity not being an option.
All three of these reasons are caused by ineffective marketing and management strategies and lack of financial controls. These issues can be resolved through the use of effective business processes and project management carried out by committed, qualified people. (See RAISE, Chapter 10.)
Additional Reasons for Failure
There are other reasons for failure, some much less obvious than the above. Focusing on the wrong numbers, trusting the wrong people or not investing in research and good advice may lead to your downfall. Many problems don’t always present themselves as possible causes for failure. The most common of these are:
- Not having a profit improvement plan
- Not having a plan for cash flow accumulation
- Having products and services that are not differentiated enough to increase price.
- Being in a market that is not niched correctly
- Lack of a self-sustaining lead generation and sales system
- Lack of focus toward recurring revenues
- Lack of an acquisition process
- Lack of a process to rejuvenate and innovate the business every 18 to 24 months
- Not having a system in place for productivity improvement
Indicators that Failure is Imminent
- Declining or negative net worth
- Too much long term debt and mortgages
- Owners taking draws that are killing profit and/or cash flow
- Inventory is old, slow-moving or too heavy in work in process
- Lack of timely reporting strategies
Don’t Let Good Luck Fool You into Failure
When the luck runs out
A company can get lucky and stay profitable and growing for a long period of time. The factors that contribute to this growth are one or more large customers that are experiencing growth themselves, a great product or service, or a few key employees that the owner can count on. Sometimes this “luck” can last for years, but eventually your competitors will catch up to you and surpass you because they have documented and effective processes that give their business the power and longevity necessary to surpass those relying on “luck”. They are not relying on luck to get them through; they are implementing processes and taking steps to ensure that their systemic growth is continual.
Without written effective sales, financial, operations and management processes you put yourself at high risk of failure. When that big account goes away, or those key employees are no longer there, or someone has created a product or service that is better than yours and you cannot compete, eventually your business will fail.
Do you have the ability to look forward to the end of the fiscal year with a sense of confidence that this year your business will grow profits?
Is this belief proven by the processes you have implemented and steps you have taken to ensure it, or is it just a hunch?
Can you look three to five years into the future to a time when you will be free from the same stress and worry that you have experienced in the past?
Without detailed documented processes and quality people, the stress will continue to build and failure will be imminent.
- What is the cost of not having effective management and marketing processes?
- What is the cost of not having a cash flow planning process?
- What are the cost consequences of procrastination with excuses such as “We don’t have the time.” and “We can’t afford it right now.”?
So what do you think? Even though you have run out of options, you don't just want to walk away. Take a look at the steps required to Shut Down a Business.
Or, you see some positives and want to keep it going, take a look at what you need to do in order to turn your business around.