Has it ever puzzled you that all too often, when a business seems to be doing well, it suddenly goes “belly-up”? What always amazes me is that the business’ leadership invariably has a list of “bad luck” reasons for its demise, whilst observers often see obvious failings.
Let’s go back a bit. It seems like yesterday to me. I was a 19-year-old first year Business Science student sitting in a lecture room listening to Mr Jochelson, or “Jock” as we called him, imparting his wisdom to his captive audience.
“You must understand”, he said. “There are three certain ways to go out of business:
- Trusting experts.
- Focusing on revenue, not profit.
- Running out of cash.”
In the decades since then I learned that Jock’s pronouncements, whilst being essentially correct, need some elaboration.
Trusting Experts
The problem with “trusting” is that it often means “abrogating responsibility for”. Business owners feel that they lack specialist expertise and need to hand over responsibility to an “expert”.
Whilst responsibility can be handed over, accountability cannot. In the end, you are still accountable for something your so-called expert did.
The problem with “expert” is that, too often, experts are self-appointed. Your lawyer’s university degree doesn’t make him or her an expert in labour law or trademark and copyright law. Your accountant’s qualifications don’t make him or her an expert in business valuation.
A recent example is our local sports club’s board handing over responsibility for an employee unfair dismissal claim to a labour lawyer. It cost the club a six-figure payout and a year’s loss of business focus. Instead of the war of attrition advocated by the expert, a process of calm negotiation with the employee may have been a less costly solution.
I am not suggesting that you never turn to the experts when faced with a business problem requiring specialist expertise. But, when doing so, always make the effort to learn a little about the field. Then you will be able to ask the right questions and be more discerning about the advice given. Also, you will be able to retain responsibility for decisions made and treat the expert’s advice as exactly that – advice.
Focusing on Revenue, not Profit
It is so easy and exciting for small businesses to focus on “feet through the door”. How do I ramp up sales? How about offering a special price? Let’s launch an advertising campaign.
Whilst businesses cannot make a profit without sales revenue, the reverse isn’t true. Achieving good sales without making a profit is all too common. It always boils down to the same thing – financial mismanagement - failing to track expenses and neglecting to understand and control profit margins.
Small businesses often only find out if they’ve made a profit when preparing their annual tax returns. By then, it may be too late to save a sick business.
Definition of an auditor: Someone who goes onto the battlefield after the battle has been fought and bayonets the wounded.
Anon.
To control profitability a budget is essential. Then, businesses need to have a tracking system to flag cost over-runs. This could be as simple as a spreadsheet. One of the large businesses I worked at used a system of spreadsheets and pivot tables to manage finances for many years before investing in a management accounting system.
Running Out of Cash
Jock pointed out that it is possible to be profitable and go out of business. The reason for this is extended collection periods – making sales on credit but lacking confidence in collecting payments timeously.
Sometimes, this is because there is a fear of upsetting valued customers by pushing for payment. Those customers probably have no qualms about badgering their customers, though. And they know how to delay their supplier payments. That is why their bank balances are probably healthy!
Ironically, the closest I ever came to going out of business involved both profitability and cash, as well as one more – my business partner’s practice of mixing personal and business finances. Mixing personal and business finances created a tangled mess that made it difficult to realise that the business was in trouble.
When we ran out of cash, the response was to collect payments even quicker (by leveraging personal relationships with clients) and delaying payments to suppliers.
Both tactics had limited prospects, and we had to refinance the business by selling 51% control to another company in the industry.
There’s More
Jock’s three ways aren’t the whole story. Here are a few more pitfalls that may contribute to a business’ demise:
Not Listening to Your Customer (Assuming You Know Best)
A brilliant product or service means nothing if there’s no demand for it. So often entrepreneurs are so in love with their ideas that they fail to listen to their customers. “Build it and they will come” is a lazy, arrogant and risky mantra.
Is the business thinking about what it likes to sell, or what customers want to buy?
The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself.
Peter Drucker
Most markets are fluid and dynamic. Sticking stubbornly to a superseded business model is a sure path to obsolescence. Failing to innovate is a death sentence in today’s fast-paced business environment.
Consider the market for books. The traditional bookstore still exists, but it has had to adapt to online competition as well as competition from alternative formats, like Kindle. Those bookstores that did not adapt have disappeared, like a well-known local chain.
Mastery is great, but even that is not enough. You have to be able to change course without a bead of sweat, or remorse.
Tom Peters
Alienating Your Customers
Have you noticed that it is easy to see whether a business is customer-focused or self-focused by the way it does things.
When you call the customer service help line, do they go through a convoluted customer authentication procedure, followed by having to repeat your story and question, before being transferred to the right department and having to go through the same process again? This happened to me six times in a two-week period and, each time, the call took nearly two hours.
The irony is that companies like this don’t seem to go of business too easily due to their monopolistic power.
However, retail customers who get ignored whilst staff are immersed in doing things to suit themselves tend to vote with their feet when they have alternatives.
Creating a Toxic Work Environment
Customers also notice the atmosphere and inter-personal dynamic in a business. A toxic work environment stemming from poor leadership quickly demoralizes even the most motivated employees and leads to decreased performance. The best performers are usually the first to leave. The poorer performers feel threatened and resist change. What normally ensues is a race to the bottom.
The magic formula that successful businesses have discovered is to treat customers like guests and employees like people.
Tom Peters
Winking in the Dark
Having the best product or service in the world is irrelevant if no one knows about it. It’s like winking in the dark. You know what you are doing, but no-one else does.
Unless your business is visible, you cannot expect queues of customers. Marketing is an investment, not an expense (despite what the accounting experts might tell you!). Neglecting to engage with both current and potential customers will leave you invisible in a crowded marketplace.
Overextending Yourself
Successful businesses often become victims of their own success. There comes a point when, to continue to grow and thrive, the businesses founders need to change their mindset to avoid spreading themselves too thinly.
Expanding too rapidly stretches resources and can lead to the original reason for the business’ success being diluted and even lost. It is tempting to get carried away with impressive business expansion, but it seems that controlled growth is much more sustainable.
Perhaps this is why so many seemingly successful businesses suddenly find themselves in trouble.
What have you noticed about the businesses near you that have ceased to be?