Front Range Community College Blog

Top 6 Reasons Businesses Get into Trouble

drawing of a business person holding a help sign under a pile of paperwork

My teenage son has his driver’s permit. I give him pointers on keeping the vehicle between the lines and on avoiding obstacles. Unfortunately, such personalized guidance rarely exists for the entrepreneur, as evidenced by abysmal business failure rates.

I consider myself an optimistic guy, but I’m more likely to talk with an entrepreneur about minimizing problem areas versus cheerleading possible success strategies. Why? Because while there are dozens of unpredictable paths to business success, there are only a handful of reasons that threaten the survival of a business.

My Top Six business minefields:

Not understanding your competitive advantage.

Most people resist change. It’s human nature. Is your product/service compelling enough that people will change their behavior and spend money with you? We consulted with more than 650 entrepreneurs last year, and most of them grossly underestimate how hard it is to sell their offerings. Can you define your target market? Do you have resources to communicate your product’s benefits to this market? I know a company that builds moisture-proof credit card swipers for car washes. Car owners spend 40 percent more on a wash when they use a card. This is a major competitive advantage when the company talks to its prospective customers, the car-wash owners.

Not charging enough.

A business owner has no control over many factors. However, setting prices is largely within the control of the business owner, but it shocks me how seldom this tool is used.

I see business owners working to exhaustion, selling out of their products every year, suffering declining margins, but still not increasing prices. It’s mistakenly seen as “good customer service” to keep pricing “low.” I maintain that most customers are looking for the best value, not the lowest price.

Not understanding cash flow.

If you have survived a cash-flow crisis, the importance of managing this process will be seared into your brain forever.

Are your customers paying you when they should? Do you pay vendors too quickly? Do you have a rough concept of your cash-flow highs and lows over the next 30 days, the next quarter? If your business has inventory, are you “turning it” at the right level to support your customers, yet not be a cash drag?

In a physical space that’s too big.

The entrepreneur falls in love with an available space. It is bigger than she wanted, but it is in the right part of town, and the broker says “you will grow into it.”

What is more likely to happen is that the entrepreneur will now work extremely hard to make the oversized lease payment instead of supporting the business. In my opinion, if your rent and utility costs are higher than 12 percent to 13 percent of your sales, you will have a difficult time making a profit.

Not having clear job responsibilities.

Most businesses have a few core processes: a sales/marketing process, an operations/fulfillment process, an accounting/financial process and some sort of human-resource process. It is vital that a competent individual have responsibility and authority to make each process work.

Yet I see businesses that leave entire processes unattended, with damaging results. I have seen this with larger businesses with employees, with husband/wife businesses, and with multi-generational businesses. It is vital to have communication about the management of these interconnected processes.

Not cultivating a working relationship with your banker (or lender).

The average bad-debt ratio in the banking industry is 1.5 percent, which means the bank needs to bet right 98.5 percent of the time.

A business owner wants his banker to support him, which means that you need to invest time to make sure your banker understands your opportunities and challenges, and has confidence in how you’ll manage those. I made it a point to have coffee with my banker every four to six months, to keep the communication open and current.

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ABOUT THE AUTHOR

Mike O'Connell is director of the Larimer Small Business Development Center and a former business owner. Reach him at (970) 215-2300.