Steve Abercrombie is a lecturer at the Louisiana State University Graduate School of Banking who teaches a course on Advisory Banking. The following are Steve’s thoughts on why businesses fail based upon the many thousands of businesses he and his firm work with annually.
- Failure to plan before startup
Many businesses have no written business plan before startup or before launching another firm. Frequently, this results in a shortage of capital that is not evident until the business is off the ground.
- Failure to monitor financial position
First, firms fail to retain a good accountant that understands the business. Then, sometimes the proper financial metrics are not in place to help monitor financial progress or decline.
- Failure to know the difference between price, value and cost
Steve indicated that when businesses get into problems, choice number one is usually to increase value and sales. Many don’t know the breakeven metrics, thus increasing size digs them deeper into the hole.
- Failure to manage cash flow
Checks cannot be written on profits. Inventory, whether it is corn, beans or widgets, must be sold to generate cash flow. In a business, cash is king. That’s to those holding out for $5 corn.
- Failure to manage growth
Wow, 25% percent of all businesses filing bankruptcy were coming off their best year profit-wise. Businesses that grow need capital, and working capital specifically. Many growing businesses just outgrow their capital.
- Failure to borrow properly
Many times part of the problem in business failure is the lender. Borrowing with the wrong terms, funding long-term assets out of cash flow, and short-term borrowing can be devastating. Low interest rates are only one of many factors to consider when selecting a lender.
- Failure in business transition
Many businesses fail to train the successor. Steve indicated that this factor will rise to the second leading cause of failure in the next few years as more businesses transition to other partners or family members when current owners and managers retire.
Editor’s note: Dave Kohl, The Corn And Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected].