It is often uncomfortable to talk about business failure. However, business failure is only half of a picture. The other half is business success. They are the “Yin and Yang” of doing business. Pro football teams review their prior week games to determine what worked and what didn’t. Plays that worked are repeated or enhanced, and plays that didn’t work are discarded or tweaked. The Bureau of Labor and Statistics tracks the number of business starts and the number of businesses that are still in existence by year – in essence, the “success rate.” Between the 1st and 2nd year approximately 20% of businesses disappear. Around year five approximately 50% of businesses have disappeared. Our focus should be on all tools and methods that help increase the success (and reduce the disappearance “failure rate.”) Note - not all businesses disappear for failure: some are sold, some are successfully closed down, etc. In this article, success and failure are captured in the phrase “Business Longevity.”
This can be illustrated with three types of people: the first is a planned, deliberate individual that is extraordinarily health-conscious and measures many aspects of their life. A second individual is a happy-go-lucky person who lets life evolve. Their motto is “Que sera, sera” (whatever will be, will be.) The third person overindulges in many aspects of their life. They do not control their eating habits or their drinking habits, and as a consequence, they are overweight, out of shape and in generally poor health. If we evaluate these three on their lifespan, which person has the highest chance of dying first? Some people have even begun to use health longevity specialists. These are physicians who focus on helping people extend the quantity and quality of their life.
This analogy can be compared to the business world. There are three types of businesses that fit the same profile. The first is a planful organization. They create plans, they execute the plans, and they measure the resulting success (or failure) of the plan. The second type of business goes from activity to activity depending on where the opportunity is most significant. They may also believe that generating sales will solve all the problems of the organization. The third type of organization is not planful and does not follow any discipline in regards to finances, employees, etc. Which of these three businesses is most likely to experience financial difficulties and potentially a shortened business existence?
This leads us to the concept of business longevity. Business longevity is the practice of assessing where an organization is, determining where the organization would like to be, and then creating the action steps for the business to arrive at its the chosen destination. This may sound similar to business planning, and yet it is much more expansive. The assessment that an organization should go through would encompass areas such as evaluation of historical financial trends, industry analysis, competitor analysis, environmental scanning using tools such as PESTLE and planning tools such as strengths, weaknesses, opportunities, and threats. It should also include a robust evaluation of future innovations and changes in society as a component of the SWOT analysis.
One of my favorite tools is the Altman Z-score. Traditionally this is a tool used to depict the likelihood of bankruptcy, however, the author uses this as an overall measure of the health of an organization similar to the way that a doctor uses a blood pressure analysis. Also, consider expanding the length of time financial information is reviewed. Current financial practices of comparing this year's results with prior years are too shortsighted. If you looked at any two successive years for Sears, the story of their failure does not “pop out.” If you review ten years of their financial information, it is plain to see how the company was declining. At a minimum, a company should understand their key financial metrics including the z-score and selected ratios (such as the current ratio) for a minimum of 10 years or the length the business has been in existence.
Who is Jim Lindell
Jim Lindell is President of Thorsten Consulting Group, providing strategic and financial consulting, professional speaking, training and executive coaching. He is a Vistage Chair and responsible for two CEO groups in the Milwaukee area. He is an Award-winning Speaker and Best-Selling Author. Contact him at 262-392-3166 or [email protected].
Jim Lindell is a National Speaker, Author, and Vistage Chair. He is motivated by helping others improve their lives and businesses.
He is President of Thorsten Consulting Group, Inc.
Order Jim's book - "Controller as Business Manager".
controller as business manager - jim lindell - thorsten consulting group
Controller as Business Manager
