The Grey Chronicles

2008.November.20

Business Failure: Early Warning Signs


Christine Asaba (2006) enumerated the following warning signs, though not meant to be exhaustive, when a company begins heading into turbulent waters.


Control environment: Any self-respected advisor should be able to produce a comprehensive list of the company’s internal control shortcomings and the risks to which could expose the entity.”

Annotations: There could be inadequate or exhaustive management information that management were unaware of a potential risk issue as it develops. Lack or the existence of unprocessed information is usually the case, but if there is a ton of minute details that the company is buried with it, just for the sake of collecting them, then probably the company overlook the obvious from the mountains of information. Furthermore, preparation of a SWOT matrix for a company should be done prior to the acquisition rather than it being performed during this troubled economic times?


Cash flow problems: Be wary if you’re so thinly capitalised that just meeting day-to-day bills becomes a chore.”

Annotations: The lessons of NSC is a very good case study. Debt financing as opposed to equity-based company is prone to bankruptcy. Apparently, it’s not impossible for a profitable, fast-growing business to run out of cash and be forced into bankruptcy because it couldn’t finance inventory and receivables or manage credit.


Growing too quickly: Every business owner wants their business to grow, but expanding with no infrastructure in place makes a business ripe for failure.”

Annotations: Tremendous losses can be incurred if the company expands outside the core market, especially without the proper research. In a similar study, Bernard and Jensen (2002) found that " . . . plant size, age and productivity are important determinants of plant survival. . . closures occur more often at plants that are part of a multi-plant firm and at plants that have recently experienced a change in ownership."


Losing focus: Business owners often fail when they lose focus. They stray away from their core product or service or become too dependent on ancillary products.”

Annotations: If we are in the business of selling cold-rolled coils, then emphasis should not be on selling cut-to-length sheets, or catering to the highest bidder for scraps. Customers patronize us because of our primary product: coils. In contrast, Bernard and Jensen (2002) found that "The characteristics of product markets are strongly associated with the likelihood of exit. Single-product plants are much more likely to fail in any five year period than plants producing multiple goods."


Loss of customers: Pay heed to increased customer complaints and decreased customer traffic. Disgruntled, fleeing customers could be costing your company thousands in lost revenues every year.”

Annotations: The costs of keeping a customer are a lot cheaper than the cost of getting a new one. What might be really needed is a better customer service and marketing, or perhaps a more skilled sales force, rather than chasing a hot trend as opposed to listening to our customers.


Thus, to conclude:

“Failure is, in a sense, the highway to success, inasmuch as every discovery of what is false leads us to seek earnestly after what is true, and every fresh experience points out some form of error which we shall afterwards carefully avoid. ”

John Keats

“Successful management recognizes that it is not omniscient, and that it can (and will) make mistakes. The recognition of failed enterprise and its termination are necessary prerequisites for managerial success. ”

(Coelho and McClure, 2006)


Notes:

These passages and references were originally partly included in the thesis, but were excised in the final copy.

Christine O. Asaba(2006). Business Failure: Early warning signs, The New Times 28 May 28, pp. 1-3. back to text

Andrew B. Bernard and J. Bradford Jensen (2002) The Deaths of Manufacturing Plants. June 2002. pp. 1-47. back to text

Philip R.P. Coelho and James E. McClure (2006) Learning from Failure July, 2006. pp. 1-20. back to text

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