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Business Failure Can Be Optional

Choose any list of “top reasons” for business failure, during any period of time, from any business record or database, etc, and you will find almost all of them have one thing in common.

Here is a compilation of the most common top reasons of business failures, which come up in most of the published lists I came across. What do you think they share in common?

Financial Risk

  • Poor financial records
  • Badly managed receivables and credit
  • Poor Quality Assurance
  • Lack of understanding of pricing
  • Over-leverage
  • Growth strategies not supported by working capital

Operational Risk

  • Lack of clear accountabilities amongst employees
  • Low employee engagement and training
  • Lack of understanding of suppliers operations and risks
  • Pressure from creditors
  • Low or no insurance covers
  • Lack of independent advice

Market Risk

  • Poor customer relations
  • Competition ignored or not understood
  • Industry and market trend not well understood and monitored

The common thing among all these reasons is that they are all under your control.

Warren Buffett paints the picture beautifully: “It’s not until the tide goes out that you can see who has been swimming naked.” So the tide is not under your control but wearing nothing is your decision.

It is not uncommon to hear entrepreneurs, or CEOs of large corporations, blaming “adverse” conditions behind their business failures: We borrowed a lot, and then interest rates started to climb; it’s our bad luck! We blame the weather for getting wet and not the lack of foresight to carry an umbrella.

Fatal hiccups

Also, it is rarely the case that business fails because of one “big” reason. It is mostly a series of small hiccups that have been ignored over time, which contribute to the final blow. And there is often a “catalyst” that triggers these hiccups.

Example

The catalyst may be a high-interest rate environment but a highly leveraged company may experience pressure from more than just the higher interest payments. The hiccups you have failed to respond to may be higher receivables as clients stop paying on time because of their own reduced sales and/or as other clients start to favour your competitor who has been promoting a lower cost for a similar service.

I am always bemused when I see businesses or corporations laying off their “valued” employees, blaming things like exchange rates, demand in China, fierce competition, etc., as if they were tricked by the tide! And what is more bemusing is how sometimes many shareholders nod their heads in agreement.

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