Why Businesses Fail _ How To Avoid It

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					Why Businesses Fail &
How To Avoid It
 Recognizing the Warning Signals
 Analyzing Your Critical Risks
Being Aware
   To anticipate possible problems,
    entrepreneurs need to monitor and recognize
    changes in
       their own ventures
       their industry
       the overall economy
Being Aware
   Recognizing early warning signals can help
    an entrepreneur:
       Identify small problems before they become big
       Find out which products or services are
        profitable and which are not
       Identify the best ways to cut costs or reallocate
       Apply new ideas
       See the venture from different perspectives
The Warning Signals
   Rapid Growth
       Companies growing very quickly must still find
        the time to take accurate and up-to-date
        information, in order to make sound business
        and growth-relate decisions
   Records Management
       Entrepreneurs must review financial records for
        warning signals of trouble up ahead – e.g., A/R
        growth indicates customers taking longer to pay
The Warning Signals
   Undercapitalization
       Entrepreneurs must be sure to raise enough
        money to start the venture – even with healthy
        sales, the business can go bankrupt if it doesn’t
        have enough cash flow
   Insufficient Profit Margins
       If revenues do not cover expenses, the venture
        will fail
The Warning Signals
   Financial Mismanagement
       Unrealistic sales expectations or underestimated
        costs increase the potential for failure
   Poor Employer-Employee Relationships
       If employees are not happy, employee-
        management problems will take up a great deal
        of time and affect your company’s success
        [measure staff turnover and absenteeism to
        gauge employee satisfaction]
The Warning Signals
   Changing Technology
       Keep informed of technological changes in order
        to stay competitive (e.g., debit cards)
   Outside Factors
       Stay abreast of external changes [e.g., industry,
        economy, government policy changes] by
        reading newspapers, joining trade or business
        organizations, etc. Then plan for “just in case”
   Personal Stress
       Every life needs balance between work and play
Minimizing Risks
   Perform a critical risk analysis during the planning
       Identify problems you may encounter
       Make contingency plans to minimize or avoid them
   Implement risk reducing strategies as the business
   Realistically dealing with critical risks shows
    potential investors/lenders that you understand
    your environment and business, and that you have
    sufficiently planned for challenges that might arise
Analyzing Your Critical Risks
   Competition
       What will you do if your competition decides to
        cut its prices or offer improved service?
   Sales
       How will you minimize the effect of lower-than-
        projected sales figures?
Analyzing Your Critical Risks
   Management
       Where will you get key management personnel if
        someone leaves the team?
       What will happen to the business if something happens
        to you or the manager?
   Legal factors
       What legal protections such as patents, copyrights, or
        trademarks are in place?
       What licenses must be obtained and how often do you
        need to renew them?
       What laws or regulations do you need to know about?
Analyzing Your Critical Risks
   Human resources
       How can you compensate for an inexperienced
        management team or for lack of skilled
       What human resource needs will the venture
        have in the future and how will you meet them?
   Operational
       How will you cover any losses caused by
        shoplifting, liability to the public, or property
Analyzing Your Critical Risks
   Financial
       How will you compensate for capital shortages or
        customers who don’t pay their bills?
   Other Areas of Vulnerability
       How can you make sure your products won’t become
       How will you deal with periods of low sales that result
        from cyclical changes or economic downturns?
       What exit strategy will you use if and when you decide
        to leave the venture?

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