Primary Cause of Expected Failures: Mismanagement

By NANCY PROFFITT, President of Proffitt Management Solutions and Proffitt Management Leadership Institute

The economic downturn is the most common thread of all discussions so many of my clients are having these days. Many people who have been laid off have started their own businesses – but knowing how to run a business is proving much harder than most ever thought. Just because we know how to make good widgets does not mean we know how to run a good company that makes good widgets.

In all my readings the past few months, article after article refers to mismanagement as a leading cause of business failures. I see it everyday in my business coaching practice. Fortunately, my clients have seen the value of engaging a certified business coach to help them through the maze of running a business in today’s volatile climate.

I have gathered a lot of the information I think is critical to share with all who are thinking of starting a business and all who are in business. This article is a culmination of many savvy business people.

A major factor in the cause of business failures is the misunderstanding of how to manage profits profitably while leading people effectively – people from the CEO level to sales to warehouse to bookkeeping.

Mismanagement, more anything, accounts for the majority of business failures.  Mismanagement outranks poor sales, bad markets or competition according to CBS.MarketWatch.com reporter Keith Girard.

The primary mismanagement mistakes include the following:

1. Inadequate accounting records. "You can't manage what you don't measure," says Girard. "Running a business without solid, comprehensive accounting is like building a high rise office tower without a blueprint."

2. Taking on business that should not be taken and passing on business that could be highly profitable.  

3. Unrealistic margins because of uncontrolled costs. Much smaller profits are found in margins that often are much too thin. Those uncontrolled costs negatively impact businesses faster than business owners realize.
4. Poor internal controls. CBS.MarketWatch.com's Girad cites good record keeping, clear delegation of responsibilities and formal tracking systems as ways to avoid the internal and external fraud that can ruin businesses.

5. Failure to sell profitably.  More sales does not result in more profit unless done properly. Managing growth is critical to business success. Many successful business owners have known someone who grew too fast and grew right out of business.

6. “Insufficient working capital. Above all else, says Steinberg, businesses must maintain positive cash flow. Unfortunately most business owners do not have the techniques necessary to do so, even though their businesses inherently have the ability to generate cash flow.”

7. Underinsured- incorrect insurance. Taking that risk that “nothing will happen to me” is a blind misstep resulting in not just business failure but personal ruin as well. Think that you are saving money on front end may cost 100 times more in the end. Insurance should be a major factor in the proper capitalization for new business owners.

8. No strategic thinking and business planning. Hope is not a strategy for successful business. A well developed plan is crucial for smooth success. You wouldn’t take road trip without map, why would you run a business without a map.

 9. Failure to hire and adequately train and develop employees. New business owners usually spend far too much time working IN the business instead of transitioning the daily operations of the business over to trusted employees, so they as owners can work ON the business.

 10. Not seeking advice or professional help. In smaller businesses, everything starts at the top. Entrepreneurs by nature aren't educated or trained in all aspects of running a business. They should get professional business coaching and advice to keep them focused on what is really important and then held accountable.

"An entrepreneur's main goal should be to look at the business as a means to an end, which is to enhance his or her quality of life," says IPA's Steinberg. "The surest way to that goal is to turn a profit and maintain positive cash flow in all economic climates.”