The Causes Of Normal Failure

The symptoms outlined in the previous chapter are the outward signs of decline. While it is the symptoms that kill you, the real cause of death is the underlying disease.

An unpalatable truth about business failures is that the insolvency practitioners who deal with failures generally think that, if your business has survived its first three years, the most important underlying cause of failure (whatever the precipitating event) will be how you manage your business.

However, on a more positive note, if this is true, you control how you manage your business and so it is totally within your power to do what is needed to save it.

When looking at the causes of failure there are four important points to bear in mind.

1. The Situation May Appear Highly Complex

You may find the situation appears highly complex because there will often be a number of levels of causes underlying the business’s difficulties. Usually, some primary underlying cause (such as a lack of leadership and/or investment) has allowed a variety of secondary causes (such as inefficient production or a lack of new products) to grow over time until a crisis is precipitated by some specific new cause (such as a new competitor entering the market who uses new technology). This then impacts on a wide variety of areas across the business, leading to many different symptoms, all of which need to be addressed.

One of the ways an experienced outsider can often help in these situations is by providing a fresh pair of eyes to help you to cut through the apparent complexity so as to identify the real issues. In fact, the fundamental issues usually turn out to be the reasons for your inability to address the many individual apparent problems. For example, a lack of leadership might simply arise where a managing director who is shy has inherited a business he did not actually want to run.

2. Short-Term Requirements Must Be Balanced Against Long-Term Requirements

One of the fundamental tricks in running a successful business is to be able continuously to balance short-term requirements with long-term requirements. The short-term requirement is that you need to be generating cash and profits. The long-term requirement is that you need continuously to be reinvesting cash and profits into the future of the business to ensure you satisfy customers (and, hence generate profits and cash) into the future.

With a turnaround, the short-term cash position is likely to be very tight, while refocusing and reviving the business will usually require a long-term reinvestment of time and money. So in a period of turnaround the apparent conflict between these two imperatives will be at its greatest.

3. The Whole Business Needs Moving Forward Simultaneously

As well as balancing the present needs of the business with those of the future, you need to balance the pace of development and change across the different areas of the business so that the whole business moves forward simultaneously, and across all functional areas.

Example

Company C employs 50 people and is looking to double its turnover over three years as it comes out of a turnaround. As sales expand it has to expand the fulfilment side of its business (i.e. production and delivery) and also the financing of its operations so as to avoid overtrading.

This means it must expand its back-office administration to cope with the extra paperwork involved, and its accounting systems will need upgrading to handle the increased functions. It will thus need bigger premises and more staff. As more staff are recruited and trained so that staffing levels approach 100, the business decides to expand its management team to include a dedicated personnel manager who will look after this function of the business.

If the company’s sales had increased but it had not expanded its other supporting functions and resources at the same time, eventually the company would get into difficulties in supplying its customers and might well run out of cash.