Why Businesses Really Fail

By Bruce Firestone | Uncategorized

May 23

And
Why Even Mighty IBM Can’t Forget the Basics

Below are some data published by
BusinessWeek on why businesses fail. I’ll bet you that the top five reasons
(too much debt, inadequate leadership, poor planning, failure to change and
inexperienced management) are in fact related to number six on their list: not
enough revenue; i.e., business not generating enough income is probably by far
the biggest cause of business failure and they are not generating enough
revenue because of inadequate leadership, poor planning, failure to change and
inexperienced management, which also means they can’t meet their debt
obligations.

KEYS TO FAILURE 

The top reasons most businesses fail,
according to 1,900 professional who help troubled companies:

1. TOO MUCH DEBT 28% 
2. INADEQUATE LEADERSHIP 17% 
3. POOR PLANNING 14% 
4. FAILURE TO CHANGE 11% 
5. INEXPERIENCED MANAGEMENT 9% 
6. NOT ENOUGH REVENUE 8%

Data: Buccino & Associates, Seton Hall University, Stillman School
of Business (BusinessWeek, August 25, 2003)

If you have enough revenue, you will get
financing today, not the other way round. This is the lesson of the false boom
of the late 1990s and early 2000s when VCs and others financed startups with
interesting business models but no revenue or early prospect of revenues. This
has almost never worked, in any age.

If you have enough revenue, you can meet
debt servicing cashflow demands so a focus on revenue growth is vital. One
needs to not only generate revenue but collect it too. This seems self evident
but a lot of startups don’t do billing, invoicing and collections very well.

How long do you think mighty IBM would last
if it didn’t collect its receivables? IBM sells around $105 billion (in 2012)
worth of goods and services (one customer at a time, btw); their monthly
revenues average around $8.75 billion. Also in 2012, IBM had around $18 billion
in free cashflow which means, like everyone else, they have bills to pay—only
theirs are humongous. Their payables are approximately $87 billion per year, an
average of $7.25 billion per month. If they somehow ‘forget’ to collect their
receivables for three months, their AR (Accounts Receivable) would balloon by
$26.25 billion. Worse, their receivables would be aging fast. Meanwhile their
employees, contractors, suppliers, Landlords and so forth would expect to be
paid over the same period; their AP (Accounts Payable) during that time would
be around $21.75 billion which they would have to pay from existing bank lines,
cash on hand or via deferment. Even for IBM, this is untenable; they would be
in serious trouble in less than 90 days as bankers, analysts, shareholders and
other stakeholders become increasingly nervous. Their CEO would not last out
the quarter.

So we need to be cautious in how we interpret
the Seton Hall University Stillman School of Business data. In my experience,
the number one reason for failure is absence of buoyant revenues. I mean how
many businesses have you heard of folding if their revenue numbers are
ratcheting up every month?

@ProfBruce 
@Quantum_Entity