Deadly Sins of Business
By Sam Allman
Most businesses that fail do so because of their owners’
“sins.” Usually it’s not for lack of hard work. On the contrary,
most owners put in long hours. The problem is that owners don’t
succeed for working hard; they succeed because they produce results,
plan ahead and optimize their resources. Working hard is no
guarantee of success. With this in mind, here are seven common
causes of business failure. In their own way, each of these "sins"
can undermine an organization, sabotage results and ultimately lead
to business death. Read them carefully. If you’re guilty, “Go and
sin no more.”
Deadly Sin #1: Drift and Squander:
Owners drift when they harbor no vision of their dream store.
Remember: “Without vision, businesses perish.” Owners squander
resources when they fail to set strategies that drive their
company’s growth. Together, goals and strategies are the catalyst
for growth. It’s not news, but a sad reality that “drift and
squander” describes the plight of many small businesses with fewer
than 10 employees (and even some larger ones, too). Their owners
continue to “do” business (that is, directly serve customers)
instead of “run” it. They reap bitter fruits: (1) Burn-out, working
strictly for take-home pay; and (2) “Flat-out,” building no
company-equity. They own a job, not a business. When they retire or
sell out, they receive the market-value of tangible assets, but
nothing for their years of hard work.
Articulate your dream business in writing; then determine the
strategies that will drive you there. Be strategic!
Deadly Sin #2: Waste Cash: Avoiding bankruptcy requires thrift. Thrift is easy
when you have no cash, but it’s much harder when you are flush. Cash
tempts business leaders to spend. Some forget that cash-in-hand is
not spendable cash. Accrual-based accounting measures the flow of
value, not the flow of cash. Many companies plunge into bankruptcy
while showing a profit on their P & L. The cause of death: Lack of
Determine your spendable cash by preparing a quarterly statement of
cash flow. Ask yourself, “How effectively did we exploit our three
cash-sources: operations, selling assets and borrowing? In
operations, how much cash flowed in through sales, and flowed out
through expenses, accounts receivable, inventory, and accounts
payable?” Next, prepare a "Forecast of Cash Flow," to estimate
future cash expenditures. If you foresee a need to borrow, confer
with your banker before you actually need it. As the saying goes:
“Bankers lend to the rich, not the poor.”
Deadly Sin #3: Run in the Dark:
For ten years, Frank ran his business in financial darkness. Once a
year, he looked at his financial statement, but didn’t know what he
could learn from it. Ignorantly, he believed he was doing okay if he
had cash to pay bills and a bit leftover. That ignorance led him to
waste both money and opportunities.
Assure that you receive three financial statements by each month’s
fifth day. Analyze the key numbers by comparing them to your
forecast and your prior period. The key numbers are sales; gross
profit margin, expenses, accounts receivable, and inventory as
percentages of sales; inventory yield; accounts payable; net
operating cash flow; sales per salesperson and per employee; return
on total assets; and current ratio.
Deadly Sin #4: Operate from the Hip:
In many companies, the cost of not doing business equals net
operating profit. That is, if we did everything correctly and
avoided the cost of fixing errors, we could double profits. Common
errors include botched orders to suppliers, mis-measures, overlooked
tasks, resources wasted on searching for something, and inefficient
employees scrabbling to fill in for co-workers who call in sick.
Such sins we call “operational inefficiency.” In many
Establish operational systems. You may like being independent but
the truth is franchises survive at a much higher rate because they
have systems in place that maintain operational excellence. Design
your organization’s structure: create and enforce job-standards and
procedures, write detailed job descriptions, and hold employees
accountable for measurable outcomes. Let your systems do the
“science” part, so employees can invest their energies in the art of
serving customers. Systems enable ordinary people to accomplish
quite extraordinary things.
Deadly Sin #5: Copy Your Competitors:
Trying to beat competitors at their game only cuts profit-margins.
The best you can hope for when trying to imitate a competitor is to
look just like they do. Even when you succeed, you lose … and price
becomes the only difference. You keep pricing yourself into lower
margins, and inevitably you invite business-suicide.
sell price. Always sell value. When you sell value, expect to lose
some shoppers (perhaps 20 percent). But don’t lament the loss.
Price-shoppers incur costs, not profits. Serve them as a charitable
donation, if you wish, but not as regular fare. You can sell value
when customers find your offering is both distinctive (“I just can’t
get the same service anywhere else!”) and valuable (“I never have to
worry about delays or hassles; I can count on them!”) Customers
won’t believe you’re the best until they know you’re different.
Refuse to compete on someone else's racecourse. Build your own and
Deadly Sin #6: Seek Mere Satisfaction from Customers: Satisfied
customers don’t come back nearly as often as loyal customers. Your
surveys may report a high percentage of “satisfied” customers, but
don’t expect them all to buy again, or to recommend you to friends.
Satisfied customers can be seduced by a lower price or a new
product. Far more important are loyal customers. They won’t walk
away to save a nickel.
build your customers’ loyalty. Ask them what they like about your
business. If it’s your service packages, products or prices, they
can be lured by competitors. If it’s your service or your people,
they can resist competitors’ bait. Respect your employees, so they
in turn respect customers. Respected customers become loyal.
Deadly Sin #7: Ignore Your Employees’ Productivity:
The seventh profit-reducer is low employee productivity. Most
workers (per various surveys) admit they put in “just enough effort”
to keep their jobs, but they could produce more if they were
inspired to do so. Are most of your workers complacent? It’s a “sin”
to do the business so intently that you ignore their productivity.
Calculate: (1) your cost of payroll as a percent of sales; (2) sales
per salesperson; and (3) sales per employee. For salespeople, track
their closing rate, average ticket, credit sales, and gross profit
margins. Then, study the data: are they exceeding industry averages
and meeting your expectations? Over time, has their productivity
degenerated? (It will, until you install systems to regenerate it.)
Next, tell them, again, what you expect. Then, help them achieve it.
Send them for training. Observe them working. Point out all
below-par performances, inefficiencies and errors. Explain your
motive: not to carp, but to enable. You seek to facilitate their
success by optimizing their skills. You want them to become the
best. Then, as soon as they progress, recognize their growth. Your
sincere concern will regenerate their enthusiasm for work.
Now, ask your
self which of theses seven deadly sins are you committing? (If you
do admit to any, you're better off than those who commit the eighth
deadly sin: pride or thinking they’re perfect.) That sin is the lack
of awareness of the other seven. Now that you know: Go and sin no
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