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My Top Six Reasons Businesses Get Into Trouble

Friday, April 28, 2017

My Top Six Reasons Businesses Get Into Trouble

My teenage son has his drivers permit. I give him pointers on keeping the vehicle between the lines, and avoiding obstacles. Unfortunately, such personalized guidance rarely exists for the entrepreneur, as evidenced by abysmal business failure rates.

I consider myself an optimistic guy, but I’m more likely to talk with an entrepreneur about minimizing problem areas, versus cheerleading possible success strategies. Why? Because while there are dozens of unpredictable paths to business success, there are only a handful of reasons that threaten the survival of a business.

My Top Six reasons are:

1) Not Understanding Your Competitive Advantage- Most people resist change, it’s human nature. Is your product/service compelling enough that people will change their behavior and spend money with you? We consulted with over 650 entrepreneurs last year, and most of them grossly underestimate how hard it is to SELL their offerings. Can you define your target market? Do you have resources to communicate your product’s benefits to this market? I know a company that builds moisture-proof credit card swipers for car washes. Car owners spend 40% more on a wash when they use a card. This is a major competitive advantage when the company talks to its prospective customers, the car wash owners.

2) Not Charging Enough- There are many external factors over which the business owner has no control. However, setting prices is an area largely within the control of the business owner, but it shocks me how seldom this tool is used. I see business owners working to exhaustion, selling out of their products every year, suffering declining margins, but still not increasing prices. It’s mistakenly seen as “good customer service” to keep pricing “low”. I maintain that most customers are looking for the best value, not the lowest price.

3) Not Understanding Cash Flow- If you’ve survived a cash flow crisis, the importance of proactively managing this process will be forever seared into your brain. Are your customers paying you when they should? Do you pay vendors too quickly? Do you have a rough concept of your cash flow highs and lows over the next 30 days, the next quarter? If your business has inventory, are you “turning it” at the right level to support your customers, yet not be a cash drag?

4) In a Physical Space That’s Too Big - The entrepreneur falls in love with an available space. it’s bigger than she wanted, but it’s in the right part of town, and the broker says “you’ll grow into it”. What’s more likely to happen is that the entrepreneur will now work extremely hard to make the over-sized lease payment instead of supporting the business. In my opinion, if your rent and utility costs are higher than 12-13% of your sales, you will have a difficult time making a profit.

5) Not Having Clear Job Responsibilities- Most businesses have a few core processes; a sales/marketing process, an operations/fulfillment process, an accounting/financial process, and some sort of human resource process. It’s vital that a competent individual have responsibility and authority to make each process work. Yet, I see businesses that leave entire processes unattended, with damaging results. I’ve seen this with larger businesses with employees, with husband/wife businesses, and with multi-generational businesses. It’s vital to have communication about the management of these interconnected processes.

6) Not Cultivating a Working Relationship with Your Banker (or lender)- The average bad debt ratio in the banking industry is 1.5%, which means the bank needs to bet right 98.5% of the time. A business owner wants his banker to support him, which means you need to invest time to make sure your banker understands your opportunities and challenges, and has confidence in how you’ll manage those. I made it a point to have coffee with my banker every 4-6 months, to keep the communication open and current.

Mike OConnell is the Director of the Larimer Small Business Development Center (SBDC), and a former business owner. The Larimer SBDC has been hosted and significantly sponsored by Front Range Community College for 30 years. The Larimer SBDC and Loveland Business Development Center provide “street-smart” business education and connection to resources.

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