Business Failure: What are the Signs?

By: Prof. Enrique Soriano

All entrepreneurs face the possibility of failure, and a good deal of “popular wisdom” holds that failure is not only possible but probable for the small business owner seeking to launch his or her own enterprise. It has long been said that four out of five new businesses fail within five years of their establishment.

Business failure is defined as the closing of a business that results in financial loss for at least one of the business’s creditors. According to business expert George Fox, the associated term is business dissolution. It refers to the formal termination or closure of a business as well, but with dissolution, financial loss (for the business owners or for the business’s creditors) is not necessarily a part of the equation.

Lots of small companies go out of business for reasons that probably shouldn’t be called ‘failure’—the owner may have gotten bored, for instance, may be disappointed with the returns, or may simply want to try a greener pasture.

Nonetheless, thousands of small business ventures do fail every year.  “Companies stumble for many reasons,” observed Clyton Christensen in Across the Board, “among them bureaucracy, arrogance, poor planning, short-term investment mindset, inadequate skills and resources, and just plain bad luck.” These factors—as well as myriad others—can have a debilitating impact on an operation, as many small business surveys will attest.

 

IGNORING THE WARNING SIGNS CAN BE FATAL

Most small business failures do not come out of the blue. Certainly, business failures that result from natural disasters or the sudden death of a key business member cannot be anticipated, but most businesses tumble as a result of more mundane factors. Incessant customer complaints and surges in back jobs or returns are often early warning signs of operational problems. Basic financial tools such as balance sheets and financial statements, meanwhile, can be very helpful tools in helping business owners diagnose what is ailing their company.

Systems may be used in alerting the owner or executive to critical areas in his business so he could strengthen his or her management process through some form of financial preventive intervention. A review of the following critical areas, from which danger signals may emanate, will alert business owners to their most vulnerable spots including possible resolutions that can shield the business from further harm.

No 1, Cash Is King. And therefore Cash flow management must be addressed at all times.  A good entrepreneur should know where company funds are at all times. He/she must keep an eye on cash flow – the lifeblood of the business.  Many elements such as payroll, equipment and supplies, etc.  are predictable to the extent that they can be planned and provided for by means of an expertly prepared cash flow forecast. Study what activities (these are cost centers) are not contributing in the revenue side but directly affecting the cash flow; they should be immediately taken out of the equation.

Understand what it takes to secure a credit line before you start your business. It’s always easier to get money when you don’t need it, so don’t wait until you’re desperate. Develop your business plan using conservative projections and don’t be overly optimistic. Profitable, fast-growing businesses can also run into cash crunches that can ultimately lead to bankruptcy. That’s why ongoing cash-flow analysis—tracking the money coming in and going out of the business—is a must.

A business owner who is beset by multiple difficulties and responsibilities may call on a turnaround expert or coach to help him chart his needs – what to expect on the basis of current operations and how to monitor the cash flow to spot trouble as soon as it starts.

To be continued

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I will be delivering a one day talk on March 9 at Elizabeth Hotel in Cebu. The event entitled, ” ON BECOMING A 100 YEAR OLD FAMILY BUSINESS: Building An Enduring Legacy of Stewardship is the second of a series of Family Governance advocacy initiatives organized by ExCED Institute and ICON Executive Search in collaboration with Wong+Bernstein Family Advisory. Second generation COO Franco Soberano of publicly listed and family led Cebu Landmasters will join me as co- speaker.

The event is a follow through leg of the hugely successful program in Manila last year, where my co speaker was Kevin Tan, the second generation successor who recently assumed the CEO role of Alliance Global, the holding company of his billionaire father, Dr. Andrew Tan.

Due to limited slots, please call Dennis Uyaco at 09177983118 to reserve seats. 

 

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Prof Enrique Soriano is a World Bank/IFC Governance Consultant, Senior Advisor of Post and Powell Singapore and the Executive Director of Wong + Bernstein, a research and consulting firm in Asia that serves family businesses and family foundations. He was formerly Chair of the Marketing Cluster at the ATENEO Graduate School of Business in Manila, and is currently a visiting Senior Fellow of the IPMI International School in Jakarta.

 

He is an associate member of the Singapore Institute of Directors (SID) and an advisor to business families worldwide, a sought after governance speaker, book author and have written more than 200 articles and publications, including two best-selling Family Business books (Ensuring Your Family Business Legacy 2013 and 2015). You can read Prof Soriano’s business articles for free at www.Faminbusiness.com 

 

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