I’ve posted here before on the problem of survivor bias and how hard it is to identify causes of business failure. Where do you find the people who failed? Do they tell you the truth? Do they even know.
The first cause: profits aren’t cash. Janine writes, specifically:
About 60% of the businesses I reviewed were profitable when they failed, but they were upside down in terms of cash flow.
Fascinating: “about 60%” of these failed businesses were profitable when they went under. I’d read “more than 40%” in this context sometime in the 1990s.
Conclusion: watch your cash flow. Those of you with business-to-business sales are particularly vulnerable because businesses normally pay later, not now. Sales in those cases aren’t necessarily money until later, sometimes months later, sometimes never. And those of you who manage products, with inventory, are also particularly vulnerable. You typically spend the money way ahead of making the sale; and sometimes you spend the money without ever making the sale.
… doesn’t turn up in research. At least, not any research I’ve ever seen or heard of. Consider these problems with the research studies:
To get valid data, you have to start with a random list. And where do you get a random list of businesses that failed? There’s no source I know of. You might be able to find businesses that were registered as legal entities, then disappeared … but if they disappeared, then what good is the contact information? And how do you know whether they disappeared because they changed names, or got bought by a larger company, or simple lapsed because the owners decided to do something else? You don’t.
Businesses rarely fail for single causes. What looks to one analyst like lack of working capital will look to another like failure to collect outstanding bills, and to a third like weak marketing, and to a fourth like failing to offer value to customers.
Business owners rarely know the real causes. We business owners don’t always see the real causes. We focus on one thing instead of another. If we were looking at the business and seeing the causes of failure accurately, then we might have been able to avoid the failure.
And if they do, they might not share it with a survey. Survey respondents don’t always tell the truth. You can ask owners of failed businesses why they failed, and most are going to say what feels good to them when they say it.
So what? So don’t worry about research results that make conclusions of business failure. Run your own business carefully. Plan, set goals, find ways to track and measure progress against goals, and revise the plan frequently.