Thursday, July 31, 1997

Why firms fail: It's not the economy, stupid

By Jan Norman / Orange County Register

William Lobel has seen plenty of failure in his 28 years as a business bankruptcy attorney.

And Lobel doesn't hang out the gone fishin' sign just because the economy is on a roll. In fact, he's gearing up for a new wave of companies to file for Chapter 11 protection from federal bankruptcy courts.

Why? Companies get hungry in lean times, so they tend to binge as the economy recovers, then suffer cash-flow indigestion.

This phenomenon illustrates that the economy rarely causes business failure. The reasons businesses fail don't change much from decade to decade or with good or bad times.

Dun & Bradstreet, which tracks business failures, used to ask why the businesses failed, "but we discontinued those surveys because the reasons were very stable," says Joe Duncan, D&B's chief economic adviser.

"Ninety percent of failures are the result of bad management, and the other big reason is failure to respond to change," he says.

When asked why businesses fail, other experts don't disagree with Duncan, but they do provide some subcategories.

-Bad management:

As Duncan defines it, bad management encompasses everything from bad marketing to bad production to lack of specific skills.

"Usually an owner starts a business because he has a particular skill. He's a technical person or a manager," Duncan says. "As his business grows, he lacks the breadth of skills to run it."

Chuck Benson agrees. He's a counselor with the Service Corps of Retired Executives in Santa Ana.

"SCORE sees some people who are unfit for what they're trying to do," he says. "They have a lot of money, so they want to open a gift shop, but they never worked a day in their life."

Some business founders fail to recognize the need for a mix of talents, adds Tiffany Haugan, director of Accelerate Technology Small Business Development Center at the University of California, Irvine.

"Particularly they don't appreciate how different people and functions come together. The technology person focuses on technical aspects; the marketing person focuses on people. No one is there to balance different viewpoints."

-Failure to adapt to change:

Bankruptcy attorney Lobel sees many cases of companies that did not keep up with market changes.

"That's usually the case with restaurants," he says. "They don't keep up with trends."

Sometimes new laws undermine companies that fail to adapt, Lobel adds. Lobel expects upheaval among manufacturers as a result of the North American Free Trade Agreement and among health-care companies from cost-containment legislation and the growth of managed care.

Many failed businesses ignored changes in customer preferences, Duncan adds.

"A few years ago it was shops selling Cabbage Patch dolls; today it's Beanie Babies," he says. "When the fad goes away, they don't adjust."

-Lack of a plan:

Bad management can also encompass lack of planning, says Ragu Nath of the Orange County Small Business Development Center in Santa Ana.

A high percentage of failed businesses "lack a well-thought-out, comprehensive three-to-five-year game plan covering all facets of the business, updated every six months," he says.

SCORE offers a monthly workshop on writing a business plan.

-Failure to track financials:

Another bad management move is failure to gather and understand financial data about the business, says Nath, who is a certified public accountant. This ignorance is a major failing for high-growth companies, agrees Accelerate director Haugan.

"People always estimate cash flow will come in quicker than it does," she says. "Cash is like blood in the body: It has to be circulating to live."

Many small-business owners don't keep track of payments and don't check the credit worthiness of customers or suppliers, Duncan adds.

-Taking people for granted:

Another fatal mistake that Nath often sees is "taking people - customers, employees and suppliers - for granted or keeping them ill-informed, treating them with disrespect."

-Lack of marketing:

A business could have the greatest product, well-kept financial records and skilled managers, says Benson of SCORE, "but it will have trouble if it doesn't market."

Dun & Bradstreet's Duncan places marketing under the management skills that failing businesses lack.

"If they lose touch with their customers, they can't follow trends and they'll lose business," he says.

Surprises:

Some failed businesses fail to respond properly or quickly to unexpected events.

"They're hit with an unexpected expense, usually in the form of a (court) judgment," Lobel says, "or they don't foresee the effects of new laws."

Lack of effort:

Finally, many people launch their enterprises without realizing how hard they will have to work, Haugan says.

"People who want to pursue a business really have to make it their life," she says. "You need more effort than brains."

Benson of SCORE adds, "They're not willing to put in 16 hours a day for four or five years. You have to be serious. If you want a hobby, collect stamps. Don't do something where you're risking your life savings."