Sunday, March 15, 2009

Basic Small Business Management: Why Some Businesses Fail?

It always pays to read good business books. Why? Well, you’ll learn a lot. If you’ve been thinking of starting a business, or if you have been running your own enterprise for more than a decade, it never is a waste of time to read because in the process, you are able to update yourself to whatever changes or trends that are going on in your industry.

Let me highlight something on this particular post – what makes a business successful? Is it pure luck? By the way, is there such a thing as “luck” or is it just being the right person in the right place at the right time with the right goods or services to sell to the right people (which can happen if you’re observant of the industry changes and trends and has a keen eye for new opportunties)? How about destiny? Say, you were born into Filipino-Chinese parents, are you destined to get rich and become the next whatever tycoon?

So why do so many businesses fail? According to Clifford Baumback’s book on Basic Small Business Management, it is commonly due to POOR MANAGEMENT. “It is poor management…that is at the root of most of the operating problems of small business,” Baumback said. And poor management is evidenced by conditions such as:

1. Inventory Imbalance. According to Baumback: “Many business failures are the result of poor judgment in buying.” If you’re into retailing, maintaining balance in your inventory is crucial. Furthermore, he said, “An inventory may be out of balance in either direction; that is, it may be too large or too small. If it too large relative to the demand for it, the cost of carrying an inventory will be higher than it need be. On the other hand, if the inventory is too small relative to the demand for it (that is, if inventory turnover is too fast) stockouts will occur.”

2. Overextension of Credit. “Business is dependent on a constant rotation or turnover of capital. Some small businesses get into hot water because they extended unwarranted credit in their eagerness to make sales.”

3. Excessive Overhead and Operating Costs. Chinkee Tan said in his interview on Go Negosyo that the secret to most business successes is keeping low overhead costs. According to Baumback, “Some small businesses tie up too much money in fixed assets, while others lack adequate expense controls, and operational expenses become top-heavy.”

4. Cash Flow Difficulties. Baumback said, “In cases where a firm’s need for cash is greater than its cash inflow, the firm is not able to pay its bills when they become due and therefore is technically insolvent.” I guess, in most cases, it’s true after all – that you (constantly) need money to make money.

5. Competitive Weakness. According to Baumback, competitive weakness happens when (1) the firm is unable to overcome the lower costs of its more efficient competitors, (2) poor location, (3) business operators fail to understand the changing world about them.”

1 comment:

Philippine Jobs said...

I think succeeding in business also needs guts and a little bit of luck.