After taking a look at a huge selection of small businesses and focusing on several them, I have observed certain patterns of conduct recur again and again that lead to eventual failure. If your company is in difficulty, it's typically a management problem, scarcely ever bad luck.
Each time a company survives for quite some time but finally comes upon hard times, it usually means (a) that there's a valuable core of talent and expertise somewhere in the corporate structure yet (b) some persistent management inadequacies have gradually eroded its strengths and left it susceptible to whatever adverse fortune it encounters.
In an instant, I'll enter those areas that cause management the most trouble, but first permit me to clarify one point. While this short article centers around the lessons I have learned about operating small manufacturing businesses, much of what I discuss is applicable to the practical problems faced by operating units of sizable companies.
In my judgment, you can find three principal areas of weakness in small businesses that cause trouble, these management centered.
1. Growth of sales is commonly viewed as the perfect solution is to all problems. There is an unawareness that, except in the short run, there is no such thing as fixed overhead. Managers, trapped by the concept of marginal income accounting, draw out additional products, believing that their overhead won't be affected.
2. Inadequate product-cost analysis blinds managers to the losses incurred with the addition of services willy-nilly. Usually, there are one or more products or products that should be dropped.
3. Gearing operations to the income statement, while ignoring the balance sheet, is all too common. Insufficient concern with cash flow and the productivity of capital employed may be fatal. Managers tend to seek new funds instead of creating better use of those they already have.
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