The Fine Line Between Business Failure and Business Success

The results of a major research study into small/medium enterprises were recently released which provide an interesting insight as to the reasons for and impact of business failures.

The study was conducted among 1018 business owners or business decision makers of organisations of 200 employees or less.

The study also was conducted among 212 accountants or principals of accounting firms servicing small and medium enterprises.

The study was commissioned for CCH Australia and the results released in April 2013.

A number of questions were raised with both the SME enterprises as well as accountants to that business sector.  Let's have a look at some of the results:

Reasons Why Businesses Fail

The 3 major reasons, according to SME owners and managers, were as follows:

1.       Failure to manage costs/anticipate rising costs

2.       Inexperienced management

3.       Poorly designed business model

On the other hand, accountants listed the major reasons as:

1.       Poorly designed business model (eg no business plan)

2.       Inexperienced management

3.       Insufficient capital

There is a remarkable similarity between the two groups - I would suggest that although SME owners and managers have ranked failure to manage costs as the major reason, this really is a symptom of a non existent or deficient  business plan and inexperienced management. The main take home here is that you can be good at the things your business does however your chances of failure are great if you have poor management skills to go with it. This is the message of that book which is compulsory reading for all business owners, the E Myth, by Michael Gerber - read it if you haven't as yet!

Another interesting observation from the study was that 66% of SMEs believe that businesses often fail for reasons out of the owners control. I see this as a major issue for business owners - most financial problems are caused by poor management decisions or internal factors rather than external factors - and that is a fact!

The Cost of Business Failure

SMEs ranked the financial cost to the owner as being the biggest cost, closely followed by the financial cost to staff, including losses of wages, entitlements and superannuation.

Further, the emotional cost to the owners and family and financial cost to creditors and suppliers were also indicated as major costs.

It is quite common to see relationship breakdowns which have been caused by financial challenges experienced in the family business

When Are Businesses Most at Risk

SMEs indicated that they believed that a business was most at risk between the  first and second year after commencement. Accountants, on the other hand, believe that period of greatest risk is in the first six to 12 months.

On a case by case basis, the quality of management and business model pursued by a business will determine the most likely timing of any adverse risks a business may face. In most cases, it will be deficiencies in these two areas that have been the reasons a business has been started with insufficient financial resources, resulting in a substantial increase in risk of failure.

Is Business Failure a Necessary Stepping Stone to Success?

66% of SMEs believe that business failure can be an important stepping stone to future business success. I would agree to this providing the owner/manager has learnt valuable lessons from the failure.

Who Do SMEs Trust as Professional Advisers?

Reassuringly, 82% of SMEs agreed that their accountant is their trusted adviser, not only for financial accounts but also for advice on continued success and growth of their business.

On the other hand, 70% of SMEs trust their own instincts over the advice of their accountant or other professional. In a way, this is not surprising due to the entrepreneurial nature of SMEs.

What Does This Mean?

Your accountant needs to be your "Trusted Adviser". He or she needs to be more than your once a year tax preparer. If you are not working with your accountant to make your business better and enhance your success or wealth, you may need to ask some serious questions of your relationship. Of course, a pro active accountant will already be asking you important questions, including, but not limited to:

• What are your goals?
• What are your strategies for achieving these goals?
• How is your progress?
• Are your assets protected?
  
  And working with you to develop strategies to ensure success in your life is achieved!
  Is this what you are getting with your accountant now?

Business Failures on the Rise - What You Can Do Now to Avoid Being a Statistic

Some 20 years ago I went to a seminar on business development and strategies for business growth. At that seminar I picked up one really critical principle - the principle known as the Pareto Principle or the 80/20 rule.

I subsequently purchased a book written by Richard Koch called "The 80/20 Principle" which provided a wonderful insight into this principle.

Simply put, the 80/20 rule asserts that the minority causes, inputs or effort usually lead to majority of your results, outputs or rewards. To put it another way, 80% of what you achieve comes from 20% of your effort - for all practical purposes, the dominant part of your effort is relatively irrelevant. This is totally contrary to what people normally expect.

So what does imbalance between effort and result  mean? Essentially:

·         80% of outputs come from 20% of your inputs

·         80% of consequences flow from 20% of causes

·         80% of results come from 20% of effort

What in general does this mean:

In Business

·         20% of products usually account for 80% of dollar sales value

·         20% of customers  usually account for 80% of dollar sales value

·         20% of customers or  products account for 80% of an organisations profits

·         20% of your expenses will account for 80% of the dollar value of your expenditure

In Society

·         20% of criminals account for 80% of the value of all crime

·         20% of motorists cause 80% of accidents

·         20% of those who marry account for 80% of the divorce statistic (sadly distorted by those who consistently remarry  and redivorce)

·         20% of children attain 80% of the educational qualifications available

In the Home

·         20% of your carpets are likely to get 80% of the wear

·         20% of your clothes will be worn 80% of the time

·         80% of intruder false alarms are set off by 20% of the possible causes

Have a good look at your life and business - I'm sure you will find that the principle will be well and truly alive. Being aware of this can enable you to reprioritise the things in your life and business to produce maximum results for minimum input!

Now the purpose of my introducing this principle to you is in support of a statement that I'm going to make - it's a hunch, but a pretty informed one at that!

80% of businesses are at best making basic wages for their owners. There you are, I've said it. In fact , I'll go one step further and say that 80% of those business owners are earning less than their best paid employee. That's a big statement I know, but a sad fact.

Now many will say that times are tough - and yes, there is no doubt that they are! However, my answer to that is that even in good times, they still were making wages at best. And that's not good enough for the capital invested in a business.

Now, I have one more controversial statement to make - of the 20% of businesses that were making a profit greater than a basic wage for their owners, in 80% of cases that was from luck, not any good planning or business strategy. So, let's now look at what we are left with - 20% of 20% of businesses or 4% of businesses out there are making profits greater than basic wages for their owners from good strategic  planning and execution. And I would put forward one further conclusion - and it is a variation from the 80/20 principle - that is I would suggest that these 4% of businesses would account for 80% of business profits  in the business community!

Now I see that is a disgrace in that most businesses erode economic value, not create it! How could that be? In the book "E Myth" by Michael Gerber (a must read book for anyone planning to go into business or already in business), Gerber suggests that for a business to be successful, the business owner must have (or buy in) three major skills as follows:

a)            Entrepreneurial skills - to identify and seek out opportunities
b)            Management skills - to manage the business
c)            Technical skills - to do the work that the business does

I will cover these concepts more in a later blog post. However, the majority of businesses owners go into a business where they are good at the technical work - however, their entrepreneurial and management skills are poor. So even though they are good at what they do, they work hard at the wrong things and their business fails. And by failure, I don't necessarily mean that they go broke - it just doesn't meet their expectations and ultimately decide that working for someone else wasn't really that bad in the first place.

It's exactly for this reason that we run seminars and workshops for business owners - to provide them with the skills and tools to improve their ability identify the things they need to do to "work on their business", not just in it.

Given the very poor profitability of the majority of businesses out there, we are astounded by the indifference shown by business owners to embracing the opportunity to improve their business and their lives -are you happy working harder and earning less than your employees? Sorry, to me this is madness and the sooner you get out of your business and let someone else take over with the right attitude, the better you and the community in general will be. Oh, and when you get out, don't expect a purchaser to pay the price you think your business is worth - sorry, it just ain't going to happen.

Here is a challenge for you in the new year - it's time to change. Make the time and effort to attend seminars/webinars and workshops aimed at improving your business management skills. Ask your accountant or contact your local chamber of commerce or industry group - they are sure to be running something that will be of value to you. We know that they can make a significant difference to your outlook and business performance.

4 Ways to Grow Your Business

In our business lives we tend to over complicate things, creating plenty of "noise" and making us blind to the basics of what we need to do to grow our business.

When you break things down to their simplest form, there are just four ways to grow your business:

1. Increase the number of customers

2. Increase the number of times they deal with you

3. Increase the average value of each transaction

4. Improve the effectiveness of each business process

One qualifing point of first point - those customers need to be of the type you want to deal with. That is, not every prospect or potential customer will be the ideal fit for your business (refer to my earlier blog "3 Tips to Starting Your Perfect Business")

Point 1 refers to the effectiveness of your marketing strategies and selling processes. That is, the effectiveness of your marketing in attracting potential customers to your business as well as your selling systems in converting those leads into sales

Point 2 refers to the customer experience that your business provides to your customers - such that they feel compelled to return. That is, rather than closing sales your salespeople build relationships. It also refers to your ongoing marketing activities to your existing customers to encourage them to come back more often. This could also involve introducing new products to existing customers or simply being proactive in keeping regular contact with them.

Point 3 refers once again to the effectiveness of your selling processes and customer service standards. After clearly identifying your customers needs, offering a range of solutions and add on sales with the aim satisfying those needs will result in an increase in average dollar sale. This can also be achieved by reviewing your pricing strategies and implementing price increases. I will address the issue of pricing in a later blog.

Point 4 refers to the glue that holds every successful business together - SYSTEMS. Systems developed around a comprehensive customer service (experience) strategy. This ensures that a customer receives a consistent and predictable experience each and every time they deal with a business.

Now, as I stated earlier, this is all very simple.But the reality is that it can be difficult to implement. Most business owners are to busy working IN their business, not ON. Just keeping their head above water. But if you devote time working ON and work on strategies and systems built on the 4 ways, a sustainable and profitable business can be developed - on the right foundation. As I say to my clients, it doesn't matter how hard you work, if the foundation or business model is flawed, success will avoid you. In fact, if the model is totally flawed, the harder you work, the worse you could make your situation.

Avoid the FTI disease (see earlier blog) - take the first steps today to grow your business and make it more profitable!