A common cure to an age-old ailment
If you spend enough time at a company, or if you’ve worked for several companies during your career, you’ll inevitably encounter slow periods, and financial hardship, and even occasionally company reorganization, liquidation, a buyout or simply shutting down operations altogether.
There are many reasons why companies fail or temporarily underperform. Among them are bad management decisions, lack of planning, lack of leadership in certain areas, diminishing customer demand, inventory or technology obsolescence, focus on the wrong product lines or service offerings, and more.
I’ve seen all of these occur at several organizations I was involved with or consulted to, and concluded that company failure was usually attributed to a combination of some of the reasons listed above.
There is, however, one common contributor to company failure or temporary hardship: Lower than expected or declining sales.
In recent years we’ve seen examples of companies that had bad or inexperienced management and lack of proper planning and other reasons that would normally cause a company to fail, or at least experience either a temporary or prolonged financial hardship, yet these companies seemed to thrive and grow rapidly despite many of the errors that good management skills should’ve prevented.
These companies had one thing in common: Sales. Customer demand was strong and increasing, and these companies, despite high inefficiencies and unnecessarily high operating expenses, were able to finance their growth simply through these sales.
This phenomenon is more common in the hi-tech industry, or in any business that lends itself to higher-than-normal gross margins. Operational efficiencies and tight management don’t seem to play as important a role as in other industries or in businesses with thinner gross margins, or companies where product or service demand is not as strong or requires higher-than-usual business development effort and expense.
Regardless of product demand, strong management and leadership and good planning, assisted by automation of the planning and budgeting process, and frequent analysis of actual results against the plan must exist in all organizations in all industries. Rapid sales growth and growing customer demand is all the more reason why you should carefully implement an effective business planning and budgeting system, one that can keep up with the growth. This blog is focused on the topic, and many of the articles here are meant to encourage financial managers and CFOs to embrace the next generation technology powering such systems.
However, no matter how great management is, insufficient sales cannot be mitigated through just maintaining or improving operations management, which your financial statements will clearly show. So, my priority in any struggling company is to first focus on sales while re-building the entire organization’s operations and other management functions.
There may be exceptions, but I’ve never seen a company that failed due to excessive sales or unusually high customer demand, which is why the common cure for many business failures and struggles is sales.