Six Reasons Why Businesses Fail

Lee Goldberg Blog

1. Poor Management

Good managers need to be able to understand their own strengths & weaknesses and that they can’t do everything themselves. Entrepreneurs tend to be very hands-on and often have a difficult time passing on responsibility to others. In order to be successful, and especially as companies grow, it is important to understand the importance of bringing in others who can provide the skills and competence to perform the work that must be done to augment your own skills. You must also be able to allow them to do their jobs based on their assigned functional responsibilities. Manage based on performance and on whether others are meeting the goals and responsibilities assigned to them. Don’t try to micro-manage. This will only lead to poor management and good employees leaving.

2. Cash Flow Issues & Lack of Financing

Companies are run based on cash flow. This means there needs to be a budget and a projected cash flow to show how much revenue is necessary to meet ongoing expenses. To the extent that you are a start up, it is important to recognize that revenue does not mean cash receipts. You need to collect accounts receivable to actually generate cash.

There will likely be a lag between generating revenue and generating enough cash to breakeven. In this case, you may need to borrow money in order to make up the cash shortfall. This can be loans from friends and relatives or applying to a bank for financing. Due to the high interest rates being charged, using a credit card is not a good source of financing unless you are able to pay the balance off each month. The ability or inability to understand and manage your cash flow can be critical to the ongoing success for your business.

3. Purchasing / Excess Inventory

Building enough inventory to meet your sales forecast is critical to being able to meet your customer delivery needs. But, building too much inventory can also lead to using up too much cash before getting paid by your customers. It can also mean that you are taking a risk that the inventory will sell through and not sit in the warehouse. It may also be possible that you will make commitments to deliver your product to the customers and not receive the inventory from your supplier in a sufficient quantity or timely enough manner, resulting in a loss of the sale.

Remember, inventory is illiquid cash. Too much inventory will eat up your cash, so it is important to time your inventory purchases and payment terms from your suppliers to coincide with the cash cycle from the time of shipment to your customer to collecting your accounts receivable.

4. Pricing – the Right Customers

It is not enough to have the right product or service and customers who want your particular product or service. You must also make sure to price the product or service correctly. If you are not making enough margin to cover your own product cost, coupled with your overhead expenses and a profit margin, then the product is not being priced correctly. That means the more product you sell, the more money you will lose. Also, it you sell to a customer who either is not paying his invoices from you in a timely manner [i.e paying you in 60 – 75 days, while you pay vendors in 30-45 days] or is returning product too frequently or taking up to much time to manage or is too costly to ship to due to his geographic location, then you should drop that customer, as you are likely losing money on him.

5. Production & Execution Risk

This is very important. Often times, in order to minimize your own direct manufacturing costs, you will have others make the product for you against your order specs. If they then deliver the product late for you to meet your customer delivery dates or they deliver the product on time, but it doesn’t meet the right specs and you can’t use it or need to send it back, what happens? It just cost you a lot of money, including the need for air freight, the cost of unusable inventory, the additional cost of making more product and having unhappy customers … and you end up losing money.

This happens all the time when dealing with overseas factories, especially in China. It also happens in your own factory. The only difference is that you have greater control of these mistakes in your own factory and can make corrections a lot faster and easier. So, while it is true that the labor costs are much lower in Asia, there is also an inordinate amount of execution risk.

6. Hiring and Managing Employees

If you own your own business and it is more than just your own personal services, such as a Lawyer or Accountant, then you will need employees to help you grow your business. You can’t do everything yourself, no matter how smart you think you are. Hire employees for the right reason. Because they have demonstrated skills or experience in the functional area needing their expertise. Don’t hire them because they are friends or someone asked you to do them a favor. You may end up having to fire them.

Your job is to figure out your own strengths and weaknesses, and then hire people who can augment your skills, assign them with goals and specific responsibilities, oversee how well they are doing and build a strong team. Similar to the military, esprit is important. People want to be recognized for doing a good job, get promotions and pay raises and feel good about being a part of the team to help grow the business. So, hiring the right people is important, but building a strong team is also important in order to become successful. That means letting them do their job and not micro-managing.