Can a business fail while profitable?

Published 10:33 am Tuesday, March 5, 2013

By Dean Swanson
SCORE District Director

One of the most common requests for help that SCORE mentors receive from small business owners is to assist with a business plan. As I have related in past columns, I have had great success with an automated option I use called LivePlan that is produced by Tim Berry, a talented small business leader. Recently, he wrote a blog that raised an interesting question: Can a business fail while being profitable? What do you think?

In some of Berry’s work he talks about 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?

I have visited with many CEOs who have gotten their small business up and running, clients love them and revenue is growing. These are wonderful times and I encourage them to savor every victory. While many start-ups are struggling to gain momentum, theirs is going gangbusters and growth looks certain.

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So, all you’ve got to do is keep doing what you’re doing and profits will start rolling in. Right? Wrong!

Janine Gilmour of Touchstone Advisory Services conducted research on over 300 failed small businesses and the results were shocking. Even when the vital signs look great, she concludes “three common problems can kill your business just as you’re thinking about scaling it up.” I will share what I learned from her.


1. Is cash flow your ticking time bomb?

About 60 percent of the businesses she reviewed were profitable when they failed, but they were upside down in terms of cash flow. What does that mean for you? Simply put, profits don’t pay the bills until you collect your receivables.

You’ll incur the costs of expansion months before you reap the rewards. If your cash flow doesn’t let you cover essential payments to employees, suppliers and the tax man, it’s game over!

Before you take on huge new sales, invest in capital items or hire new employees, you need a solid cash flow projection. With this information in hand, you can make an informed decision about planned growth and managing the risks you face.


2. Is your business model crushing productivity?

Most people are all fired up about what their businesses do. And not so hot on planning process improvements, managing cash flow or even learning to be good leaders. Successful entrepreneurs don’t just stumble into profitable growth — at least not often.

Your business model supports how you want things to run. It makes the difference between focusing your talent where you find satisfaction and reward, or racing around putting out fires.


3. Is your leadership style limiting your leverage?

Let’s say you’re a strong extrovert, with a passion for new things and connecting with people — a classic profile for entrepreneurs, and an important aspect of your drive to get things rolling.

However, you’re probably easily frustrated with the detail guys who sweat the risks associated with change. If you’re missing out on the value of diverse styles, failure to establish a middle ground is a common culprit.

Before you get bent out of shape about your differences, make sure you establish a clear and common purpose. When you all have the same goal in mind, many of the friction points get easier or vanish entirely.

So the real questions is will your business outperform the odds? Gilmour says, “the best piece of advice I’ve ever received is to work on your business just as hard as you work in your business. Saying you don’t know how, or you don’t have time, just doesn’t cut it.”

I admire the necessary drive and guts to start a business. But, if you want to be successful over the long haul, you need to get curious about what you don’t know. Find someone you really admire and discover how they became successful. And then shamelessly copy them. Surround yourself with talent, so you have the capacity to become brilliant doing something you love and reaping the rewards that accompany it. I suggest getting a SCORE mentor so you can have some with whom to talk business.