Rules of the Road

There are dangerous conditions ahead: Winding Road Ahead, Road Narrows, Falling Rocks, Steep Grade, Slippery Pavement, Deer Crossing, Signal Ahead or Do Not Enter.  The transportation departments of governing bodies, who are responsible for the roads, conveniently post these warnings.  Drivers can rely on them in order to adapt to the prevailing conditions.  By being alert and taking the appropriate precautions, they can reach their destination safely and without mishap.

Wouldn’t it be nice if business owners were given warning signs to follow when the conditions for their business to underperform or fail were lurking ahead?  Wouldn’t it be nice if the business owner recognized the warnings, assessed the danger, and made the appropriate adjustments necessary in order to correct, or even eliminate, the danger from their business?

The problem, however, is that most business owners don’t have the systems in place to recognize potential dangers, or more concerning, they underestimate the severity of the danger.  Even when they are forewarned, they often disregard the caution by convincing themselves it can wait.  This can be severely damaging, or even fatal, to their business.

Common reasons why small and medium size businesses fail include:

• Lack of understanding or not using performance-monitoring information.  It is impossible for business owners to manage an effective warning system if they do not collect detailed data on every critical variable within their business. Keeping accurate records that can be evaluated in a timely manner (of every dollar spent, material expended, and time consumed by employees) is essential in order for a business owner to understand what is truly happening within their company.  Businesses that rely on outside accounting firms to prepare their taxes are often left painfully short of having the necessary information they need in order to make important business decisions.  Tax accounting alone cannot tell a business owner if he is paying too much for rent, labor or materials, let alone provide the necessary information required to negotiate or manage these variables. Specific measuring, monitoring and reporting tools must be at their fingertips at all times.  They must also understand their meanings and use them diligently.

• Poor Cash Management/Inadequate Cash Reserves.  Without sufficient operating funds, businesses cannot generate payroll, pay their suppliers or satisfy rent and other debt.  Therefore, realistic cash flow projections are essential.  Without cash, no business can survive.  It is imperative for a business owner to ascertain how much capital their business requires in order to remain viable.
• Poor Debtor Management.  In order to ensure that the appropriate cash reserve is on hand for emergencies and/or other unexpected contingencies, business owners must make sure that their receivables and incoming cash flow is properly coordinated with accounts payable arrangements.
• Over reliance on a few key customers.  Building a business around a product or service to a sole customer may be extremely satisfying and lucrative, but it is also potentially very explosive.  If one contract is that profitable, you can bet the farm that competitors will try to take the business for themselves.  Losing a sole customer is no different than an employee losing their job, with no prospects for employment on the horizon.  Filling that void is enormously difficult and often impossible.  And if that customer is sold to another company or goes out of business all together, you’re cast into the same plight.  Profitable customers are great, as long as your business is not critically dependent upon them.  A program to continually attract new clientele will bring vitality, stability, and independence to any business.
• Poor market research leading to an inaccurate understanding of the target customers wants and needs.  Knowing who your customers are and understanding what they want seems axiomatic, but in reality, companies often miss the target completely.  In essence, it’s like the child trying to force a square peg into a circular hole.  Business owners should be able to accurately analyze their customers, by fully understanding their needs, knowing whether they are relational or transactional in nature, and deciding whether or not they will remain loyal in the future.  They need to understand the lead-time required between establishing a new client and receiving payment for a completed transaction.  They also should to recognize changes in their client’s needs as market and technology changes occur.

• Failure to price your product or service correctly.  Establishing the correct price for their product or service is not a simple task.  Business owners must have a complete understanding of all of the cost factors that are involved in creating, producing and delivering their product.  They must also take into account making a profit, or their business model is flawed.  Understanding the competitive forces that affect their marketplace is imperative, and it’s important not to let their emotions interfere with pricing.  And payment terms should conform to the cash flow needs of the company.  Extending receivables beyond the established due date will result in a denigration of the actual value of their worth (at a rate of 10% per month), which comes right off of their profit line.

In addition to the pitfalls listed above, there are many other reasons businesses fail.

• Over-borrowing; the company is over-leveraged and debt is not being reduced;
• Failure to innovate;
• Poor inventory management;
• Poor communications throughout the organization;
• Failure to recognize their own strengths and weaknesses;
• Trying to go it alone;
• Non-payment of taxes;
• No knowledge of financing requirements and conventions;
• Living beyond the means of the business; and
• Lack of planning.

Business owners must remain ever vigilant in running their business.  Having a clear focus on company objectives and gaining the necessary tools to monitor progress and performance, will not only make their job easier, but will keep them on the path to success.  Without these mechanisms at their disposal, unforeseen disasters will be lurking ahead, just waiting for the opportunity to strike the unsuspecting.