Why Businesses Fail

...Mismanaging Money.... All businesses adjust, innovate and reorganize or restructure as their respective markets and the economy force change. The question is not if but when, how and on what scale. The problem is that many businesses do not have a financial plan to leverage new opportunities or adjust for economic shifts that threaten their survival. They simply manage their day to day, try to meet monthly bills or create products that have significant short term financial upside with no eye or concern for the overall risk-reward balance (AIG...) This mismanagement, as we have most recently seen, is not exclusive to a certain size or sector. The reason you hear the term "cash is king" so frequently is the importance of available capital, not debt financing but cash. The reason cash vs. debt financing is so important is because;

1. The opportunities created by external circumstances come and go very quickly. Having the capital on-hand to take advantage of these opportunities is the key to making the most of market and economic shifts
2. The weight of carrying heavy debt loads can run a company under. When the market is good carrying a little debt is considered part of doing business, when the market conditions are bad, ranging from a market crash to a major competitor, the ability to adjust prices, provide additional benefits/services or withstand a recession comes down to gross margins

Financial and business management must go hand in hand. It is all about strategy; a strategy that prepares for market shifts and the overall business objectives of revenue and market share growth.

Every financial plan should have 3 components;

1. A rolling 1 year financial plan that is reviewed and updated each month
2. A historical financial analysis by month, year and season with notes as to special conditions that impacted revenues or profits
3. A 5 year projected growth financial plan showing the revenues and capital required for the growth objectives

In the end, it is all about the numbers. They will tell you everything about your business, your customers and the market as a whole.