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Common Characteristics Of Failing Companies
by Lee Diercks — Partner, Clear Thinking Group
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The pop culture definition of insanity is to keep doing the same things over and over and expect different results. Unfortunately, this adage can routinely be applied to the companies that I come in contact with. As a consultant to companies that are struggling financially, I probably shouldn’t be surprised by what I witness over and over again. But I never give up hope that the past will cease to repeat itself.

Here, in my opinion, are the four basic characteristics that often lead companies into financial trouble:

  • Failing to recognize reality
  • Failure to forecast cash/liquidity
  • Lack of a detailed, bottom-up business plan
  • Wrong people at the wrong time

It continues to astound me that business owners and business executives fail to grasp the severity of the situation that they find themselves in. In most instances, they often act offended when my colleagues and I show up; feeling that our presence is not warranted or needed and that the “situation” is a short-term blip on the radar screen. In actuality, the situation they commonly find themselves in is not a short-term issue. More often than not, it has been building for a long time but executives and managers have failed to recognize the depths of the issues the company faces. Recently, I was involved in a situation where a company, on average, burned thru $1.0 million in cash a week for over 90 weeks. The company was surprised by the fact that they eventually ran out of money.

Granted, running out of money is fairly common with troubled companies. What’s even more common is their lack of desire to forecast cash and liquidity. Again, a sense of reality has to be in place in order to make any forecast realistic. However, basic cash flow methodologies or forecasting credit line availability (if an asset based loan is part of the liquidity equation) is generally lacking in most of the situations that we come across. Either the financial modeling skill sets are not present or senior management really doesn’t know how to forecast cash. These tend to be the standard reasons for not understanding the future liquidity of the company and more importantly, one of the main reasons companies run out of money.

Oftentimes, there is a lack of liquidity forecasting because a company doesn’t really have a business planning process in place. Their view of the world is focused on how they are doing compared to last year. It does not take into account any of the business environment changes or how their business could be improved. The key reason for an absent business plan usually stems from the fact that many business owners/executives get so far down in the weeds, dealing with day-to-day issues, that they never ever take the time to really get above the fray and think about where they want their business to go. Subsequently, there are seldom realistic goals, plans, or ultimately a defined future for the business or a path to get there.

As in all businesses, having the right individuals at the right time in the right positions is key to any long-term financial success. However, businesses change, people change and customers change. Unfortunately, many businesses that are struggling just don’t have the correct individuals in place to improve the existing situation. Owners/executives of many companies continue to believe that the individuals that they are familiar with and loyal to can implement the necessary changes. However, in many instances it is these same individuals that have helped put the company in the situation that they find themselves in the first place. In one recent example, a company had an employee that was in a key position and regularly showed up to work late, showed a significant decline in performance, and was ultimately found to be addicted to drugs. Yet the owner kept the employee in place and lost customers because of it. When asked why, the owner said it was difficult to find good help and the process to hire someone new was too difficult.

So how do these types of companies break the cycle and ultimately put themselves in a position to be more successful? It starts with them taking a realistic look at their business. Sometimes that means retaining advisors from outside the company to provide an objective third-party viewpoint. Clear Thinking Group constantly encourages companies, even if privately held, to enlist the help of an outside independent advisor that can provide a much-needed level of objectivity. Second, they must develop a business planning process that looks at the long term. It is critical that they take some time away from the day-to-day business to think about the future and build a realistic, achievable plan. Again, if those skill sets don’t exist internally, it is critical that they seek some help from the outside. Involving key employees is also a good practice as long as they are realistic in their approach to the process. Third, they need to develop disciplines around forecasting weekly to evaluate the future liquidity of the company. Again, having a cash and liquidity forecasting process in the company is critical for future success. Furthermore, they must determine if they have the skill sets internally to do so. Fourth, they should make sure that they have people in the business that can help them achieve the company’s long-term success. All owners/executives should regularly evaluate their team member’s performance with a goal to upgrade the talent and skill sets in the company.

None of the above is easy nor will it guarantee success. However, not embracing these basic business requirements will often to future failure.

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