By Miles Stover
Why do businesses fail? It’s a subject you should understand before taking the plunge and launching your own venture.
In a series of articles, I will identify the causes that account for about 87 percent of business failures. Although I will attempt to focus on the “marijuana arena,” I suspect readers will see that their businesses are not unique in being exposed to these hazards.
The sections discussed here will be internal and external factors of failure, with more to come on the financial aspect in the future.
After I identify generally what we are talking about, I will speak specifically in future articles on how to eliminate the exposure and/or fix the situation if you are already in need of help, as well as alert you to multiple ways to get assistance and support.
The goal of this article and the articles to follow is to help you identify what problems result in business failure, identify how to eliminate or reduce the problem to a manageable level, and where to go for help and how to ask for help.
Section 1: Internal
Internal factors account for between 50 and 100 percent of business failures. Failure happens because of non-constructive conduct of management and lacking knowledge of costs.
While the rules of this industry get better defined, all teams still need a leader. But the team still needs some traits to be in place from the beginning so when the rules are defined, there still is a need for a team.
1. Leaders can’t be dictators and think they can control the environment. Sorry, but no one controls the environment right now.
2. Leaders need to surround themselves with strong people. Initially there will be a need for macro- and micro-oriented leaders and team members.
3. Leaders can’t lack an openness to change. Things will be changing weekly, daily, or even hourly. This doesn’t mean teams will need to change for the sake of change, but there will be a need to be a mechanism to change when a change is required.
Unbalanced management teams: With so many unknowns, current management teams shouldn’t be unbalanced, meaning completely sales oriented or completely production oriented. Without some balance, external threats are more likely to go unnoticed.
Weak finance function: Expect more details on this area in future articles. Initially, you do need working capital controls, such as accounts receivable, accounts payable and inventory levels. I know you “just want to sell stuff,” but budgets and internal controls are vital. It’s easy for me to say, but keep the fixed assets at a minimum level, don’t incur excessive debt, and always be lining up capital infusions. Don’t be surprised that there will be lots of equipment becoming available cheap when weak parties fail.
You are going to be busy initially. Don’t be so busy you fail for the wrong reason. You might want to read this article once a week to keep the subjects in front of you that will cause failure.
Section 2: External
The external reasons for business failure are not the minor changes in your everyday life, but rather the relatively few trends and events that threaten the core of your company and industry. Not to foresee such events and not evaluate their consequences can set the stage for failure. I call this “paying attention to your personal business and not paying attention to the world of business.”
Studies again and again show that failures don’t result from unforeseen events. In almost every case, the event was foreseen but disregarded. Aid yourself by identifying three or four resources that are motivated to follow the external changes. Magazines, such as Marijuana Venture and other business publications, are good sources. Find others that focus on your stage of interaction in the arena, because different license holders have different and specific information needs. Read them religiously. The 30 minutes a day you spend reading might save your financial life.
Good economic times often mask problems in an organization. Good times mask lots of initial environmental problems. Good performers always outperform poor performers. Good management can offset poor economic conditions. You have reason to expect there to be good times in the near-term. However, good times might not last, so let’s get your management into fighting shape.
Statistics indicate that competitive change makes up 35 percent of why individual competitors fail (6 percent general competition and 29 percent loss of market). Are you surprised that this is not the largest contributor to failure. Initially, you must expect the presence of competition to be huge as loyalties are developed.
Emergence of low-cost competitors, mergers of multiple companies and price competition will all occur in your arena. Count on it.
Social change, in terms of attitude toward the sector you occupy, should be favorable to you in the near-term. Exactly how the social change will manifest itself is unknown right now, but surviving companies will watch to understand how the changes affect them. High costs will be incurred when you don’t recognize and adjust for social change. Again, read articles from reputable authors whose job it is to keep track of social change. Don’t be surprised how society will or will not accept the changes coming.
Your job is to understand “what is the best use of your time right now.” Knowledge of how society is changing is a good use of your time. Also note that being “action oriented” is vastly superior to being “reactionary” at this point in history.
The two main sources of technological change in the external environment will be in the information and transportation areas. You know that the amount of information that will become available will be staggering. You won’t have time to read everything put before you – you do need to identify what technological changes will affect your costs and margins so keep your eyes open for those pieces of information.
Transportation will be as much as 15 percent of your variable costs and one of your top three variable costs. If you don’t believe me now, you will soon. Getting product, delivering product, costs to handle product, accounting for the transportation, inventorying the product coming in, insurance, security during transportation, transportation to packagers, vehicles, driver labor costs, associated taxes. The list goes on and on. Something as simple distributing product to and from multiple retailers and producers will be huge, especially since the regulators haven’t fully decided how it will be done.
The next article will focus on one or two very specific issues related to knowing your costs and pricing by category. We will also start to discuss the early warning signs of decline and failure.
Your future can be very, very exciting. For now, pay attention to details and watch your costs.
Miles Stover is the founder and president of Turnaround, Inc. and TurnRight, Inc. For more than three decades, he has worked hands-on with organizations from start-ups to Fortune 100 companies in a variety of roles.