Why Businesses Fail & How To Avoid It  Recognizing the Warning Signals  Analyzing Your Critical Risks

Being Aware  To anticipate possible problems, entrepreneurs need to monitor and recognize changes in their own ventures their industry the overall economy

Being Aware  Recognizing early warning signals can help an entrepreneur: Identify small problems before they become big ones Find out which products or services are profitable and which are not Identify the best ways to cut costs or reallocate resources Apply new ideas See the venture from different perspectives

The Warning Signals  Rapid Growth Companies growing very quickly must still find the time to take accurate and up-to-date information, in order to make sound business and growth-relate decisions  Records Management Entrepreneurs must review financial records for warning signals of trouble up ahead – e.g., A/R growth indicates customers taking longer to pay bills

The Warning Signals  Undercapitalization Entrepreneurs must be sure to raise enough money to start the venture – even with healthy sales, the business can go bankrupt if it doesn’t have enough cash flow  Insufficient Profit Margins If revenues do not cover expenses, the venture will fail

The Warning Signals  Financial Mismanagement Unrealistic sales expectations or underestimated costs increase the potential for failure  Poor Employer-Employee Relationships If employees are not happy, employee- management problems will take up a great deal of time and affect your company’s success [measure staff turnover and absenteeism to gauge employee satisfaction]

The Warning Signals  Changing Technology Keep informed of technological changes in order to stay competitive (e.g., debit cards)  Outside Factors Stay abreast of external changes [e.g., industry, economy, government policy changes] by reading newspapers, joining trade or business organizations, etc. Then plan for “just in case”  Personal Stress Every life needs balance between work and play

Minimizing Risks  Perform a critical risk analysis during the planning stages Identify problems you may encounter Make contingency plans to minimize or avoid them  Implement risk reducing strategies as the business develops  Realistically dealing with critical risks shows potential investors/lenders that you understand your environment and business, and that you have sufficiently planned for challenges that might arise

Analyzing Your Critical Risks  Competition What will you do if your competition decides to cut its prices or offer improved service?  Sales How will you minimize the effect of lower-than- projected sales figures?

Analyzing Your Critical Risks  Management Where will you get key management personnel if someone leaves the team? What will happen to the business if something happens to you or the manager?  Legal factors What legal protections such as patents, copyrights, or trademarks are in place? What licenses must be obtained and how often do you need to renew them? What laws or regulations do you need to know about?

Analyzing Your Critical Risks  Human resources How can you compensate for an inexperienced management team or for lack of skilled employees? What human resource needs will the venture have in the future and how will you meet them?  Operational How will you cover any losses caused by shoplifting, liability to the public, or property damage?

Analyzing Your Critical Risks  Financial How will you compensate for capital shortages or customers who don’t pay their bills?  Other Areas of Vulnerability How can you make sure your products won’t become obsolete? How will you deal with periods of low sales that result from cyclical changes or economic downturns? exit strategy What exit strategy will you use if and when you decide to leave the venture?