WhyBusinessesFail

WhyBusinessesFail August 22, 2003

Why Businesses Fail

I liked this cartoon. To me, it spoke of the business models of the world. Sometimes, we think we are getting fitter when, in fact, we are just setting ourselves up for failure. A lot of students seem to think that every business model they design needs to be brand new, never before seen or done. The Business Model needs to be good but the execution needs to be even better...

Dumb Business Models and Dumb Businesses Get Eaten

I always like to refer to the Starflyer example—a great consumer product, backed by a superstar athlete (Wayne Gretzky) that failed to generate any significant revenues. I mean the business model was based on the fact that it was new, it was well designed, it flew really well and ‘Gretz’ was endorsing it. The Starflyer was a superior flying disc that had tiny battery-powered LED lights that (using persistence of vision) generated a halo so you could throw and catch it at night. There was just one problem—no one wanted to play ‘Frisbee’ at night.

Here (below) is a graph from Business Week on why most businesses fail. I'll bet you that the top five reasons (too much debt, inadequate leadership, poor planning, failure to change and inexperienced management) are in fact related to number six on their list: not enough revenue; i.e., business not generating enough revenue is probably by far the biggest cause of business failure and they are not generating enough revenue because of inadequate leadership, poor planning, failure to change and inexperienced management, which also means they can't meet their debt obligations.

From Business Week August 25, 2003

If you have enough revenue, you will get financing, not the other way round. This is the lesson of the false boom of the late 1990s when VCs and others financed startups with interesting business models but no revenue prospects. This has never worked, in any age.

If you have enough revenue, you can meet the cashflow demands of debt servicing costs so a focus on revenue growth is vital. One needs to not only generate the revenue but collect it too. This seems self evident but a lot of startups don’t do billing, invoicing and collections very well.

How long do you think mighty IBM would last if it didn’t collect its receivables? IBM sells around $85 billion worth of goods and services a year (one customer at a time, btw) so that means around $7 billion a month. If they don’t collect for two months that means that they would have a cashflow shortfall of $14 billion so my guess is that even IBM would be in serious trouble in less than 60 days.

So we need to be cautious in how we interpret the above Seton Hall University Stillman School of Business graph. In my experience, the number one reason for failure is the absence of buoyant revenues. I mean how many businesses have you heard of folding if their revenue numbers are going up and up?