Why Businesses Fail

From an accounting perspective, reasons businesses fail because of exceed their income over a long enough period of time to require bankruptcy or liquidation. But the reason that expenses exceed income over a long period of time is usually the result of several factors that result from me the business owner’s inability to successfully manage core aspects of his or her business.

Arrogance

When a business is in decline, most business owners believe that through the power of their own will and action they can pull the business out of decline and get back on the road to profitability and success. Even more sinister is the business owner who only looks at topline revenue and assumes that as long as the topline revenue is high enough, the business will be profitable and therefore successful.

I can’t say that I’m not committed the sin. Arrogance is a sin that leads to a lot of bad decisions. Arrogance clouds our judgment and is both a state of mind and an emotion that makes us feel insulated from the dangers of running a business while simultaneously exposing us a greater measure to those same dangers.

I was speaking with a commercial loan officer yesterday and we were discussing why businesses fail. The gal with whom I was having this conversation deals with businesses in the 5,000,000 to 20,000,000 range. She commented that most of the time, when she sees business is beginning to fail, that it’s nearly impossible to talk to the business owner and help them see the danger that they are in. She commented on how arrogance is the number one factor that she sees in businesses failing. I couldn’t agree more.

This is especially true of new business owners who are running a business or first time and experience sustained success out of the gate. I know one business owner who has started a consulting company and on the first four years of existence has grown his company into a $5 million business with net profits in the 20% range. He’s making the mistakes with his employees and his culture, but when these mistakes are brought to his attention he just brushes them off. He honestly thinks he’s right and everybody else on the team is wrong.

The Christian Business Owner can escape such arrogance by ensuring that he is practicing 2 Chronicles 7.14 – confessing and repenting of his sins and asking God to heal his business and his land. If you ever want to mitigate arrogance in your life, just take time every day to ask God what sins you have to confess and then repent of those sins.

Shame

After a long run of success, most business owners upgrade their standard of living under the assumption that their income that results from their success will continue indefinitely. And often, these owners live on the edge, spending nearly all of their income on pleasures and luxuries.

When a business starts to decline, the income of the owner will be declining too. In this scenario, the owner may experience shame about not being able to keep up their standard of living – believing that a public degrade of their standard of living will result in ridicule or rejoicing from others.

This type of shame betrays a belief that one’s worth is tied to their material success. For the Christian Business Owner, we can escape this sin by ensuring that we understand our worth comes from who Jesus Christ has made us to be and not from our successes in business.

Inability to hire and fire well

I think this is the number one reason that businesses fail. Owners hire the wrong people for the jobs they need accomplished within their business. Employees can be “wrong” for positions when one or more of the following exists:

  • Their skills don’t match what is needed to perform the tasks required for the job
  • Their passions don’t match what is needed to perform the tasks required for the job
  • Their attitudes don’t match the values of the company
  • Their compensation doesn’t match the range of market compensation for the job
  • Their character doesn’t align with the company’s values and degrades those values
  • Their interpersonal skills degrade the culture of the company

When these mismatches surface – as they inevitably will – they negatively affect other employees in the office. If not dealt with directly and swiftly, other employees will eventually lose faith, confidence and trust in the owner’s ability to manage people in the office and the result is a degradation of the overall culture of the business, turf wars, back-biting, gossip and unresolved conflict. You see, strategy is trumped by culture. You have to have a good culture first before you can have a successful strategy implementation.

Most Christian business owners got into business because they have a skill or knowledge that the market needs and they saw an opportunity to make some money. But they never anticipated the hiring and firing responsibilities that would ensue from growing a business.

In order to fire well, one needs the ability to “face into the negative” and deal with conflict well. That inability to face conflict and deal with it head on is the core reason most businesses fail.

Take a look at a sample of businesses that have failed. Take a long step back and assess the reasons why that business failed. In the end – at the core – you’ll find that those businesses failed because the owners were unable to hire well, fire well and resolve the conflicts that surfaced from their lack of employee management skills.

As Christian business owners, we need to understand that our abilities to hire and fire well must be developed. But developing those skills is paramount to our success in fulfilling the four purposes that God has for business.

Bill English
CEO, Mindsharp
Associate, The Platinum Group

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