Most business owners and executives I know are passionate and hard working, and failure is not in their genes. Unfortunately, many businesses do fail, more so in today’s tough economic climate. You should be alert to these warning signs below and understand they may be fatal if not properly addressed.
1. Low Sales– You will be in big trouble quickly if there are not enough sales at a price high enough to cover your expenses and produce a profit. Spend time on pricing strategy. The old cost plus pricing doesn’t work very well these days in many industries. Know what the market price is and work backwards to see what your target costs should be. Research and validate markets before you spend time and money pursuing them.
2.Insufficient Capital- To capitalize your business properly, it’s essential you have a realistic business plan and plan for contingencies. You should stress test your plans to understand how far you can get off your plan before you have serious trouble. Establish a realistic plan and monitor and update it frequently. You should take time to develop a Plan B and Plan C so you’ll know what to do if you run low on capital. It is extremely tough to survive, let alone grow a business, without sufficient capital.
3.Competition- You must have a sustainable competitive advantage. You must understand the marketplace, who the major competitors are, and how/why you can beat them. You must respond to new competitors and respond to changes in your marketplace. Think buggy-whip manufacturers. Even the best in class didn’t do well when horses were replaced with cars. Be careful about taking on industry leaders without a niche or competitive advantage and don’t take on a niche too small.
4.Poor Use of Business Funds- This includes borrowing or investing too much in the business and making poor spending and investing decisions. Know that external accountants hired to do your bookkeeping, auditing, or taxes cannot watch all your business finances. The owner must be the CFO until one is hired!
5.Poor Credit Arrangements- Agreeing to a credit facility that has oppressive terms and conditions can be a major mistake. Talk to various experts to find out current debt market conditions for a company like yours. Spend time making sure you get the type of credit you need at a competitive cost and with an organization that can help you grow. Don’t take on more debt than you can comfortably service in a bad year.
6.Poorly Managed, Unexpected Growth- Everyone loves to see sales growth but it can also be deadly if you don’t manage it. Growing a business takes capital. Growth is good if you have the infrastructure and capital to handle it and it is profitable. If you don’t manage the growth, it’s very easy to run out of money or drag down your entire organization until you can no longer provide good service to anyone! Know that profit is more important than sales in the longer term. You should know which sales and customers are profitable and which are not. Don’t chase a new market if you’re not sure you can be consistently profitable in a reasonable amount of time.
7.Poor Inventory Management- In many businesses, this will likely be one of your largest assets and needs to be aggressively managed. Too much inventory and you waste capital, incur storage and insurance costs, and increase the likelihood of excess and obsolete inventory. If you have too little inventory, you risk long lead times and stock outs- alienating your customers. Spend time on inventory, understand what best practices and norms are in your industry. Good inventory management leads to better customer service, leaner production, more efficient capital management, and increased profitability.
8.Insufficient Management Expertise- You may have great skills in manufacturing a product or providing a service, but unfortunately that’s only part of running a business. There are other core skills you need including such things as Sales, Marketing, and Finance that need to be done effectively and efficiently to be successful. It’s not unusual for an entrepreneur (or manager) to reach a level exceeding their expertise (or time) and find they need more professional management help. The key is to recognize the situation before it becomes a major problem. It’s a wise man who understands when he needs help and then goes out and gets it!
9.Poor Location- This is important for all businesses, not just retail. You need to consider the availability, quality, and expertise of the local workforce, access to transportation and logistics, and proximity to your suppliers and customers.
10. Over Investment in Fixed Assets- Carefully screen and prioritize your capital expenditures. You should know each investment makes financial sense by understanding things like payback, internal rate of return and other basic financial concepts so you can build value in your business.