Root causes of business failure and how to spot them before it’s too late.

As business owners, it is sometimes difficult to recognize when our business is struggling compared to when it is failing. One of our top executives has an incredible presentation from an operational and financial perspective of how to recognize when your business is failing, why and what courses of action are available to you. Below is an overview:

Common myths about business failure

Myth 1: The downturn caused our problems.
Myth 2: Companies fail quickly.
Myth 3: No one saw it coming.
Myth 4: Things will return to normal after the downturn.
Myth 5: It couldn’t happen to us.

The Real Truth: “People don’t plan to fail, they fail to plan”.

Why Businesses Fail

The most common reasons businesses fail are:

1. Management inexperience/mistakes
   a. Lack of general business management skills and planning
   b. Incompetence
2. Economic factors
   a. Lack of profits, declining sales
   b. Changes in markets and technology

Early Warning Signs

1. Doesn’t seem to be enough cash to go around
2. Payroll becoming more difficult to meet
3. Non-Payroll purchasing more difficult
4. Business impacted negatively
5. Loss of lender confidence, including violation of lender covenants

Recognizing the Root Cause(s) of Business Failure

1. Management not recognizing changes occurring in the marketplace that require “thinking outside the box” to stay in a competitive/profitable position.
2. Management not recognizing until too late that the Company is in decline stage of its life cycle
3. Prices are reduced to cope with lower sales putting pressure on margins and compounding the pressure on cash
4. Operational problems
5. People related problems
6. External causes

Strategies for Troubled Businesses

1. Self-Recovery
2. Workout/Turnaround
3. Reorganization/Sale/Liquidation

Key Points

1. Most crises can be survivable if addressed in time.
2. A crisis, handled properly, can be the best thing that could happen to a business.
3. Learn from mistakes.
4. Employ crisis management techniques when business is good.
5. Stigma is usually short-lived.