The Unlikely Reason Businesses Fail and How You Can Avoid It
The day before Christmas, I received an email from a former client, Karl, updating me on his business: “Obviously things didn’t work out [[with my business]]. I’m filing for bankruptcy in February. Thank you for your help…it was just too late to make a difference!”
Certainly not the email I like getting, but it was hardly a surprise. When we worked together in the spring, it was clear his business was in trouble. He had fallen behind on a few loan payments and had already used up his CSA prepayments to cover current expenses – there was little cash in the bank. He called hoping for a magic bullet, and there wasn’t one.
I wanted to stand on my soapbox and yell to all the farmers who had said to me, “I can’t be bothered with the minutiae of the financials”:
Look! See? See this person? Karl just filed for bankruptcy because he didn’t bother with the financials until it was too late.
It got me thinking about an interview I listened to with Linda McMahon, Administrator of the Small Business Association. She said the top two reasons small businesses fail are:
- Undercapitalization (the businesses don’t get enough cash to finance their growth)
- Poor Cash Flow Management (the business owner fails to recognize and plan for the ebbs and flows of cash)
Certainly, poor cash management was a big contributor to Karl’s business failure. (And I’ve seen other businesses fail because they didn’t capitalize properly). But the underlying cause wasn’t his cashflow (that was the symptom); it was an unwillingness to acknowledge his weakness before it was too late. The weakness was that he didn’t like the numbers and therefore didn’t pay close attention to them. He just hoped that if he sold enough product, things would work out.
In other words, he didn’t want to make himself vulnerable.
It can be scary. As a business owner we want to project success and self-confidence. Customers, like dogs, can sniff out failure. For a food business, this can be a death spiral: customers perceive your business as not doing well, and therefore the food as less fresh (because of lower turn-over) and stop shopping with you even before it’s too late. If we look weak or vulnerable, then there’s a fear customers will be turned off.
But if you don’t acknowledge that you can’t do everything and need help, then you put your business at risk.
What can you, as a business owner, do to position yourself for success? Here are three tips:
- Put Yourself Out There
Business is a numbers game, and not just the financials. For example, if you need 1,000 customers to be profitable, then you need to connect with at least 10,000. The more you put yourself out there, the more opportunities you have to connect with them.
Selling requires you to be vulnerable – to put yourself in situations where you will be “rejected.” But if you don’t but yourself out there, then you also don’t have the chance to be “accepted.”
- Acknowledge Your Weaknesses
So many business owners ignore their financials because they don’t like them or think they are not good at them. It’s fine to not want to do the day-to-day bookkeeping, but acknowledge it’s not your strength and find someone for whom it is. Ignoring your weakness won’t make it go away. For Karl, ignoring his numbers didn’t prevent financial troubles. In fact, the weakness amplified his financial challenges because he failed to acknowledge them when there was still a chance to do something.
- Ask for Help
Once you’ve acknowledged your weakness, you need to figure out how to address it. You still need to have a strong handle on your cash flow even if you’re not managing it. Figure out who you can ask for help.
Now here’s the tricky thing. You can’t abdicate control of your business to someone else. It’s still your business. Get support and stay involved. You may even discover you’re good at numbers 😊.
I’m so happy for and all the farmers who succeed despite ignoring the numbers. And I hope it continues on for a very long time. But if things go south, will they see it coming? Will they know what works so they can create a plan?
I encourage you to take control of your financials now before it becomes a crisis. Build your confidence with financial management and basic accounting principles I invite to check out the video tutorials on my website, The Farmer’s Office. You can sign up for “Basic Accounting” for free!
