Business Failure Rates

Business bankruptcies reported by Experian Business Information Services for the second quarter of 2011 show some interesting results.  The most interesting being that the largest companies had the biggest failure rate.

While the publicly released data doesn't give the actual number of bankruptcies, they are represented by categories of colors from tan (least bad) to dark red (worst).  I'll represent them with numbers from least bad (1) to worst (5).  For the period ending June 2011, the breakdown in bankruptcies by business size, in terms of number of employees, is as follows:

Company Size Bankruptcies

1 - 4 4

5 - 9 4

10 - 19 4

20 - 49 3

50 - 99 3

100 - 249 4

250 - 499 4

500 - 999 4

1,000+ 5

It's not surprising that the smallest companies had a high bankruptcy rate.  But it does seem surprising to me that the largest companies had the highest rate.  Anyone have an explanation for this?

I think it shows that the medium sized companies are not doing as well as the huge companies. That Microsoft and Google and Apple's of the world have cash reserves larger some some countries is well documented.  Those are gigantic companies.  But what about the medium sized companies with 1,000 - 5,000 employees?  I think this is where the problem is occurring.  These companies don't have cash reserves in the billions and also don't have good access to credit.  Thanks to TARP and a general overreaction in the financial sector to poor decisions made in the past, banks just aren't lending much money these days.  Those that want to lend are either restrained because their ratios are out of whack or have so tightened up their underwriting standards that it's difficult for all but the best companies to qualify.

Here in Alabama, we're right in the middle of the pack as far as averages are concerned.  What is it that makes a state like Florida good and Texas bad?  That's a question for another day.

Why do you want to start a business?

Starting a new business is a scary and risky proposition.  Starting a new business can be extremely time consuming and may require participation from your family or your absence from family events.  Starting a business may require you to use your life’s savings or borrow money from the bank for which you’ll be personally responsible.  So why do you want to do this?

  

For some people, it’s just a no brainer.  They HAVE to start their own business.  They’ve been working for ‘the man’ for too long or are just tired of seeing a business run into the ground.  For others, they have an idea that just needs to get out.  If not them, who?

  

For still others, they want to start a business out of necessity.  That is, they don’t have a job and have no good prospects for finding one anytime soon.  They see starting a business as a necessary evil.

  

If you plan to make your fortune in a few months and start living the good life, think again.  Most new business owners make little or no income for the first few years in business.  In fact, many times, your employees will make more than you until your business is well established and financially stable.  You need to clearly understand your motivation for starting a business and then decide if starting a business will help you achieve your goals.  

Selling into a non-market

Do you understand who your customers are and what they want?  I think many small businesses don’t really understand this.  They think more about their product and how to sell something that they want to produce, rather than what the market wants to buy.  

  

Hugh MacLeod, author/blogger/artist one of my favorite entrepreneurs (gapingvoid.com) calls these businesses the Middle Seat Guys.  He likens businesses that sell stuff that their customers don’t want to airlines who sell middle seats.  Hardly any airline passenger wants the middle seat.  In fact, with rare exception, if you were given a choice between the aisle, middle or window seat, the middle seat will go unclaimed every time.  Hugh wonders why the airlines still offer a middle seat when they know their customers don’t want them. 

   

The ideal situation for a small business person is to find a niche within their market segment to operate.  Look at the market and the competition and figure out what the customer wants.  What are the trends in the market that aren’t being addressed?  The way we do business in almost every market is changing.  What areas of business do your competition or market leaders fail to adequately serve?

  

Yeah, this is hard.  But if you can find a niche where there is actual demand and there aren’t 100 other companies in the market already trying to serve, then maybe you’ve found a place for your company.

The Financial Reality of Starting a Small Business

Chris joins Jim Blasingame on The Small Business Advocate radio show on July 5th.  they discuss the financial aspects of starting a small business and it's affects on the entrepreneurs personal financial situation.

Radio Show Link

Jim Blasingame & The Small Business Advocate show

Entrepreneurship is a Family Affair

Chris joins Jim Blasingame on The Small Business Advocate radio show on July 5th.  they discuss how starting a small business affects the entrepreneurs family.

Radio Show Link

Jim Blasingame & The Small Business Advocate show

The Big Idea

So you’ve got a great idea for a business, now what?  The question you’re really asking is how do you turn a great idea into money?  It’s the question inside the question that entrepreneurs are afraid to ask out loud.  I wonder why that is?  Isn’t that what creating a business is all about, making a profit to support you and your family in a lifestyle you can grow accustomed?  As far as I’m concerned, it is.  I’m not sure why many people now consider profit a bad word.  We need profit to grow businesses, hire employees and make charitable contributions.  Without profit, we’d have none of that.  The answer can be summed up in one word: entrepreneurship.  In other words, turn your great idea into a business.

Merriam-Webster defines entrepreneurship as:

           “one who organizes, manages, and assumes the risks of a business or enterprise.”

The concept that a person can take an idea and turn it into a profitable business and achieve financial security is the embodiment of the American Dream.  For years, individuals have been developing ideas into businesses.  Some have taken really harebrained ideas and become overnight successes.  Can you think of any harebrained business ideas that turned into financial windfalls?  I'll talk about a couple of well-known ideas that worked out in a future post.

There are all kinds of statistics from government and private sources about how many businesses survive and how many fail.  Generally speaking, roughly 80 - 90% of new businesses fail.  And there’s a good reason.  Depending on which publication you read or which organization you believe, there are literally dozens of reasons start-ups fail.  I generally categorize business failures into three groups:

1. The idea behind the business was a silly non-star aligned harebrained idea
2. The real idea behind the business wasn’t sufficiently studied and planned
3. The individual starting the business screwed up.

In fact, operator error is the root cause of almost every business failure.  The owner didn’t understand the market, the capital requirements, the complexities of partnerships or the seriousness of cash flow.  Oh, the cash flow, that vital nourishment of all small businesses.  Perhaps the market turned sour and the owner didn’t have enough capital to sustain though the bad times.  Could we add a fourth category or fifth or tenth?  Sure.  But I generally categorize anything not a 1 or a 2 as operator error.  You can make the case (it’s semantics really) that the economy turning isn’t something that the owner can do anything about.  I could argue that the owner should have foreseen lean times and had a reserve.  Does it really matter?  I think you get the point.

If we look back to the definition of entrepreneurship, it suggests that someone is organizing and managing a business.  That someone is you.  It’s the organizing and managing that tends to get in the way of most people being successful.  That’s the part that makes starting a business such a risky proposition.  However, the statistic that you don’t usually hear is that for people who get some business education and coaching, the statistic turns upside-down.  Entrepreneurs who get business and financial education and who work with a mentor or coach tend to succeed at an 80% rate.  Now that’s more like it. 

The Fog of Fear

Unfortunately, I see this all too often in coaching and consulting clients.  Either they’re hoping to start a new business or they’re in crisis.  The former is way easier to fix than the later.  But either way, the fear has them in a head lock and they can no longer think rationally.  In fact, they can no longer see the situation clearly, which is why I call it the ‘fog of fear’. 
 
Fear is an ugly thing.  It makes us do things we would never do in a more rational time.  It causes us to make poor decisions, or more often, fail to make important decisions about our business.   Failing to act in the business world doesn’t mean that nothing happens.  It just means that you have failed to take an active part in managing your business.  You’ve chosen instead, to let your business run itself.  What I call Management by Abdication, is the worst kind of management.  Serious operational and financial problems don’t just go away…they usually get worse when left to fend for themselves.
 
Why does this happen?  Why do normally logical and engaged managers and owners get lost in the fog?
For new entrepreneurs or those still ‘hoping’ to get started, it may be an inability to pull the trigger.  They don’t have enough information or don’t understand how to tilt the odds in their favor by using standard financial and analytical tools.  Three simple tools; the income statement, cash flow report and break-even analysis, what I call the Three Tools of Financial ViabilityTM, can help hopeful entrepreneurs evaluate their business model for viability.  In other words, will real people pay real money in sufficient quantity to allow you to meet your goals?  Without some way to determine if your business model has a good likelihood of being successful, many people just can’t seem to pull the trigger.  And frankly, without any kind of success likelihood, why would you ever take the risk?
   
But the fog I’m really talking about is the fog that grips existing entrepreneurs when their business is in crisis.  Owners or managers frequently get consumed by the fear of the unknown consequences.  Maybe they haven’t run across this particular problem before and aren’t sure how to proceed.  Eventually, as the problem grows in magnitude, the fear turns into a fog that can’t be navigated.  Owners just sit, paralyzed into inaction with fear.  This is when they lose their business.  Taking no action, or inappropriate action, the business suffers further and a downward spiral sucks them into the abyss of failure.
  
If you find yourself in this situation, get some outside help.  Use your advisors or mentor to help you see the most appropriate response to the situation.  If you need to hire a financial professional, do it.  The alternative may be loss of your business.  Usually these problems are nearly as bad as you’ve made them out to be.  A little professional advice or strategy will probably help you get back on track to profitability.