It’s a fallacy to assume that all businesses can succeed in a rising economy. While it’s the case for most, some companies, no matter the size, struggle and may even fail in a strong economy. In most of those cases the source often is internal. The issue is not as economic as it is strategic. There are a few key reasons I typically see for substandard performance or even failure in a rising economy.
Poor marketing & business development
Successful businesses understand the requirements of their customers. Many had their start by addressing an unmet need in the market. But if companies don’t create a business development process they’ll eventually experience growth stagnation and customer concentration. Success can lead to complacency and, when it comes to concentration risk, bring on a crisis in a short time
Even when busy, companies should be actively engaged in a thoughtful business development and growth strategy. Prospecting is necessary for sustainability but critical when too much business is with too few customers. Ask yourself, what would happen if your largest customer stopped doing business with you?
Inadequate working capital management
Many businesses struggle with poor cash management. Companies, especially small fast growing ones, can become consumed with profitability and growth and lose control of cash.
Working capital and liquidity must be understood and should be forecasted and closely monitored to ensure smooth operations and to meet short term cash needs.
Many businesses that grow quickly depend on debt to support the growth. It solves a shortterm problem but adds significant risk and requires the company to sustain higher and higher levels of business to support the increased debt service. Wiggle room to handle a surprise is diminished and more cash going to debt-service means the business has less capital for other opportunities.
Inadequate or no business planning
It’s often said that 'failing to plan, is planning to fail'. It’s probably the truth. The question is how long will it take and what will be the cause. Planning certainly doesn’t guarantee success, but it does guarantee a better chance at success than not planning.
Growth, customer diversification, and responding to market opportunities are all reasons to plan. It doesn’t need to be difficult or complicated but should cover current risks and threats facing the business. The plan should lay out specific goals and be clearly communicated to the people involved in making it successful. Lastly, an analysis should be done of the profit and cash impact as well as any capital required to finance the plan.
Poor or inadequate management
Weak or inexperienced management is one of the major causes of business failure. In the past, attracting and retaining trained top-talent was something to aspire to. Now, it’s a necessity. Many businesses are challenged to grow due to the lack of an adequate internal talent pool to draw from.
The best strategy to solve a hiring problem is to stop the quitting problem. Today, every employee in your company has an opportunity to leave. Managers should work hard to understand why some leave and others stay if they’re going to be successful. Hard working and motivated employees will stay where the employer takes seriously the risk of not retaining them.
There are many reasons that contribute to business failure in a rising economy. Even the best run companies can be threatened. What’s most saddening are the many businesses that seem to ignore the simple opportunities they have to improve their value and survivability.
It shouldn’t really surprise us. With all the information available on improving our personal health through exercise and better eating habits, most don’t follow that advice until it’s too late. Fortunately, it’s never too late for your business to pick up some better lifestyle habits.
Greg Gauthier is a partner with Foxwood Associates Inc.