Ask an insolvency specialist the causes of business failure and the common answer I hear "It's the management. It's nearly always the fault of management doing too little too late."
Plain and simple - bad management is considered to be the number one cause of business failure by the insolvency professionals but the good news is that bad management can be fixed.
Limited Management Skills And Abilities
Unfortunately few people are skilled in every facet of managing a business and that's before personal preferences enter into the situation.
Even as a business coach offering multi-disciplinary services, I know that my strengths lie in the finance - strategy - marketing areas because that's why my interests lie.
It's the work I enjoy and it's where the bulk of my professional training and reading is spent.
I have forced myself to learn about sales, managing people, organisational behaviour and personal development but I would be quick to bring in other specialists in these areas when deeper levels of knowledge are needed.
As a business owner, you have to be the generalist. You are responsible for everything that happens in your business and you need to be able to manage your team to perform at the right level.
But as good trading is replaced by tough times, the pressure on your skills increase. What was OK performance in the good times is now a potential source of weakness.
If your business comes in financial distress, you need to act and you need to act quickly
Turning Your Business Around
On my Business Books blog I have reviewed "Turning Your Business Around" by Mark Blayney which is highly recommended for anybody who is managing a small business in financial distress.
Mark Blayney argues that functional skills are an issue when a business is in difficulty. There is very little general management training and you don't need any qualifications to start a new business. During prosperous times, small business owners can manage by the seat of their pants and muddle through.
Tough times are less forgiving.
But what really causes the problems for businesses which have previously been successful is situational skills. A business in trouble with severe cash constraints is a very different beast to one which is growing easily and business is fun.
In a situation of financial distress, three weaknesses can be fatal and quickly lead to business failure:
- A lack of specific situational skills - how to make staff lay-offs and maintain morale, how to maximise cash, how to manage the bank during the difficult times and how to protect your own personal position from the risks of wrongful trading.
- A failure to manage the crisis - some people rise to the challenge, others are paralysed by fear, uncertainty and doubt.
- A refusal to seek help from the specialist. As Mark Blayney says, if you house is on fire you call the fire brigade.
The Causes of Business Failure
There are many lists of the causes of business failure although some focus more on the symptoms that the root problems.
Staying with Mark Blayney's book as the base, he identifies five key areas responsible for business failure:
- The business management structure - the management team may be unbalanced and dominated by an autocratic CEO. Internal promotions while your business has been growing may mean that managers have been promoted beyond their skill levels or their may be an issue about management succession .
- The strategy challenges which must be managed - the business may have slowly lost its competitiveness as customer needs changed or competitors innovated. Alternatively the entire industry may be in decline. I will talk about the four pathways to business success or failure which is the basis for my business health check at a later date.
- The lack of financial control - your performance measures and cash are important at any stage but when your business is in trouble, they are critical. You have to know how you are performing and you must manage your cash flows over the next three to six months.
- The lack of operational control - your cost competitiveness comes from how well your operations have been designed to serve their purpose and how tightly managed the operations are.
- One off projects or special circumstances - management can become distracted by a big project and particularly one that turns their focus inwards to the company rather than out towards the market. A new computer project, an acquisition or relocation can all increase workloads and something has to give.
These five causes of business failure are all related to management and the role of management in causing the business to be in financial distress.
The strategic challenges may seem unfair but even if the industry is in decline, it could have been predicted and the business may have had opportunities to diversify into other markets.
The Early Signs Of Financial Distress
So what warning signs should you look out for:
- A decline in the general economy. In my posting about the beer game, I explained how small changes can cause the system to become unstable.
- Industry growth has stopped and substitute products and services are increasingly attractive to customers.
- Pressure on sales prices has increased while your factors of differentiation have eroded.
- The management team is jaded and seems tired.
- Financial management and performance measurement is weak. You are unsure how the business is really performing.
- A small number of customers represent an increasing proportion of your sales.
- Cash is always tight as you operate on your overdraft limit at all times of the month.
As an entrepreneur you are responsible for everything that happens in your business but the great thing is that you accept that responsibility. The natural entrepreneur is someone who believes they can make things happen because they are not victims of circumstances.
I recommend that you use my Eight Pillars of Business Prosperity to review your business before the going gets tough and that you start identifying the problem areas and taking actions to cure the biggest constraints which are holding you back.
If business failure is caused by bad management, then good management can save a business.
I have looked in more detail at the issues involved in managing a company in financial difficulty and whether business coaching is the appropriate solution - Business Coaching In A Recession