Preventing Small Business Failure: Top Ten Company Killers (Part I)

March 18, 2014

by Mark Paggioli

When it is time to assess the value of your business—whether in advance of a sale, as part of succession planning efforts, or for other needs —  a number of factors come into play. Along with the elements that drive real value, there are inherent risks. In terms of succession, consider that just about 30% of family and other businesses survive the handoff from the founder to the second generation. Fewer still (approximately 12%) are still viable into the third generation.

What to Look Out for to Prevent Failures

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Following are the first five of ten common reasons businesses fail, any and all of which can lead to terminal business decline. If you envision a business that not only survives but thrives after the departure of the owner, it is worth a few minutes to see if any of these apply to you. Whether you hope to develop more sustainable business practices, build the value of your organization, or prepare for succession, avoiding the following will help you achieve success in the long-term.

1.  Bad Management

Businesses tend to fail from the top down. In fact, a recent Dun & Bradstreet report found that 46% percent of business failures are directly related to poor management; 30% of those are due to lack of management experience.
What to look out for:

  • a lack of clear objectives or strategy
  • confusion among senior leadership
  • poor decision-making

This could extend to apparent difficulty in seeing connectivity among various functional areas within the business as they relate to strategic objectives. Remember, good managers are not only aware of the areas where they lack relative strength—they also address those areas head on. It’s important to remember the interrelation of various business processes, too. When it’s time to improve your physical health, focusing on exercise while ignoring diet is not going to yield positive results. You need to see the forest and the trees.

2. Cash Flow Problems

Flat or declining revenues, unfavorable expense variances, and long-outstanding receivables can overwhelm even the most experienced small business owner and lead an organization into a death spiral.
What to look out for:

  • struggling to meet payroll
  • negative cash flow for a period of six or more months
  • receivables that show a negative aging trend

3. Absence of Marketing

It could go hand-in-hand with bad management, but too many small manufacturers believe they are spending wisely when they avoid marketing costs. Good marketing can help businesses differentiate themselves, or even own specific, lucrative markets. That kind of success, though, requires an ability to express your distinct capabilities and communicate that message to the marketplace. That typically requires the use of multiple outreach channels: your website, trade shows, keyword-based ads, print media, etc.
What to look out for:

  • no established marketing budget
  • inability to articulate what makes your business valuable to your customers
  • no leads generated from your website
  • online obscurity

You need to develop a growth plan with marketing at the core. It is also generally the responsibility of the marketing group to attain—and maintain—an adequate understanding of the competitive landscape.

4. Low Sales Productivity

Even the best marketing plan relies on the existence of a motivated sales force, not to mention a knowledgeable customer service staff. Too many CONNSTEP clients have farmers on staff when they need hunters. The end result? A lack of customer variety or depth (i.e. too much revenue coming from too few customers), or insufficient industry breadth.
What to look out for:
A “no” response to two or more of the following questions:

  • Are we effective at sales prospecting?
  • Relationship building?
  • Selling on value?
  • Are we truly, effectively or strategically managing accounts?
  • Are we growing new account acquisition and expanding our sales within current customers?

5. Insufficient Financial Reserves

Businesses need to look beyond cash flow. An organization’s financial reserves enable growth by supporting the development and commercialization of new products, new equipment purchases, facility expansion, personnel growth, and new marketing efforts. Investments could also include facility enhancements. When prospects come calling to assess your organization, is your facility telling them that you are a reliable partner?
What to look out for:

  • inability to invest in research and development
  • insufficient funds for new equipment and renovating infrastructure
  • no budget for improving technology or training employees
  • lack of funds for purchasing more assets or inventory

Contact Business Growth Services

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If you’re not able to position your business to act decisively at the right time, you may never get another chance.

Next week we’ll look at items 6-10 on this list of fatal flaws. In the meantime, if you see your company reflected in the list above, contact CONNSTEP to learn more about how we can help you avoid these common business killers.

1. Bad Management

2. Cash Flow Problems 

3. Absence of Marketing

4. Low Sales Productivity

5. Insufficient Financial Reserves

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