Why Businesses Fail
By Ronald C. Manalastas Harsh and persistent recessional trends continue to constrict the United States and the global economy. A mystical and endless succession of business closures and bankruptcies stretches worldwide. With this virulent tandem bringing intense financial hardships to people from all walks of life, what seems to emerge is a general public perception that gives wholesale attribution of business failure to poor economic performance. When businesses fail, severe economic dislocation happens. People lose their jobs. Household expenditure suddenly snaps out. Families see their real and personal properties gone. Aggregate demand dwindles and cuts back productivity. A lot of companies totally cease operations. Credit and financing practically grind into a halt; if not, become highly collateral-conscious. The result: a previously hopeful and competitive nation now reeling on the adverse impact of acute business slowdown and cutthroat pressure of globalization. Which one precedes the other, poor economic performance or business failure? Which failure secretes the venom of human stagnation: business or economy? I will admit that I am not in a position to give conclusive answers to these questions, lest I raise issues that are beyond the ambit of this paper. I floated the questions to accentuate the fact that business failure can be looked at independently, regardless of the fact that most nations are in deep economic trouble now. I categorically aver that business failure is never a solitary function of economic performance. It is a phenomenon that can always happen under any economic situation, whether what prevails is a boom, a slowdown, or a recession. Where the macro-economic landscape is uncertain or problematic, I have always maintained the view: "in times of crisis, do not blame the economy, fix your company." My point is, when aggregate business performance improves, it has the enormous capacity to catapult a sagging economy to high heavens, fortifying its competitiveness and even recouping its lost glory. Singapore has once predicated its economic growth, and the glaring success of resident businesses, on a central trading posture that has given the country the capacity to now look externally. India, once a flickering economy, has focused on a disciplined propagation of its information technology and pharmaceutical industries, within which investment, entrepreneurship, and employment flourished. Bangladesh, Pakistan, and Vietnam, nations of obscure economic significance, have similarly rallied on the expansion of their garments manufacturing capacity to make their presence felt in the world markets. What is the message in all this impressive economic performance? The answer: the capacity of certain businesses in these countries to succeed despite the limitation and unassuming character of their
economy. According to Dun & Bradstreet, the most common causes of business failure are: incompetence (46%), lack of management experience (30%), and lack of knowledge on the product or service (11%) all deficiency in business knowledge and preparation. These three causal factors account for 87% of business failures; the balance of 13% represents many other causes that include neglect, fraud, and disaster. In a more succinct analysis, Scott Clark of the Puget Sound Business Journal had condensed the factors into what he calls the "three Ms of business failure" money, management, and marketing. Clark's thesis dwells on the absence, lack, and inferiority of provision for these fundamental needs of business. As Henry David Thoreau stated, "Men are born to succeed, not fail." In this context, I feel some sort of a responsibility to express my views and help enlighten people, especially the unknowing and the initiated, that business failure must be grabbed by the horn. It is pathetic and counter-productive to let settle firmly in the public mind the wholesale attribution of business failure to poor economic performance. A public mindset of such import can discourage new investors and restrict the inflow of fresh capital for business and economic renewal. To my mind, businesses fail for the following reasons: A. Failure to plan Any business is doomed to fail if it did not spring from a solid planning platform. The business plan is a fundamental requirement of any enterprise, whether sole proprietorship, partnership, or corporation. It sets out the vision and mission of the organization, embodying the strategic intent and the nature of the business venture in clear and compelling manner. The entire external context (e.g. economic, sociocultural, technology, and legal-political aspects), internal endowments (e.g. people, structure, systems, money, rights, and concessions), and competitive forces (e.g. products, markets, pricing, quality, and service issues) of the business are well identified and described in the plan. The long-term objectives are expressed in specific, measurable, achievable, realistic, and time-bounded terms. The business plan contains also the central strategy and key departmental actions to ensure that the organization, regardless of its size, is always attuned to the attainment of the long-term objectives. A responsive tracking and control mechanism that ascertains if the company is on course at any given time completes the planning exercise. What is the overall value of the business plan? It presents a strategic blueprint for the business, a good glimpse of its future, while affording the company the flexibility to adjust with any impinging variances in operating performance, the impact of general economic condition included.
B. Failure to appreciate the product-market scope A business that has been formulated on a loose knowledge of the product and its key markets is also bound to be a complete failure. Missing out the importance of the product-market scope in the origination of the business represents an omission that is in derogation of the value of the customer. In all likelihood, the product basket for which the business was conceived would not match the needs, wants, and expectations of the customer. An oversight in the product-market grid, which also encompasses the commercial, service, competitive, and regulatory aspects of a business, automatically divests any venture of a strategic rationale. I could clearly recall an engagement where I was tasked by my client to correct an erroneous business disposition and cushion the impact of the potential demise of his investment. My client was prompted by a friend to fast invest in a captive location for packed food service under a rolling store concept. To this proposal, with just some pencil pushing, my client readily acceded, invested, and operated the business. Shortly after two months, the business had to temporarily cease operation for the following reasons: 1) employees of different companies in the office building prefer the ala carte and hot food menu being served by the building canteen concessionaire 2) the city government has undertaken a broad deployment of similar rolling food stores that catered to low-end customers around the vicinity, and 3) a city ordinance had been issued restricting third party food service providers in the city's street corner locations. What is the lesson of the story? Had my client done some prior research on the customer's product and service preference in the area and other locations (e.g. usage, attitude, and image study) and on prevailing regulatory policies affecting the food business in the city, he could have avoided wasting so much time, money, and other resources. C. Failure to administer the financial aspect A financial plan is a critical component of the business plan as it documents the projected income, balance sheet, and cash flow statements of the company. It is a sounding board for potential financial problems as the business operates. The financial health of a business demands financial astuteness that mandates judicious reliance on financial ratios. Performance can be benchmarked and analyzed periodically on the provisions of the financial plan. In this exercise, it is helpful to address the following issues: 1. 2. 3. 4. 5. Are the revenues coming in as planned? Who are the customers the company should do business with? Are chosen customers contributing to company revenues? What is the current market share of the company compared to key competitors? Does market share standing need major improvement?
6. Does cost of goods sold yield the desired gross profit margins? 7. Which expenditure items unnecessarily deflate desired operating margins? 8. Are there any non-performing product lines? 9. Are prices in line with competitive offers? 10. Is there an ideal mix of equity and borrowings for funding the business? 11. Is receivable aging aligned with liquidity targets? 12. Are inventory levels responsive to financial efficiency? 13. Is there a critical need to enhance provisions for customer care? 14. What is the cash flow position of the company net of all business essentials? Any business must have the discipline of being consistently guided by a water-tight financial analysis. On a simplified perspective, in order not to fail, what it simply takes is to grow revenues as planned. If revenues fall short of plan, then control expenses to preserve operating margins at a reduced volume of business. If this baseline practice internally prevails, no matter what the economy is, the business will be in the black all the time.