From Failure to Success Report

 

From Failure to Success Report

Johannesburg, October 2009

  Introduction

If a business has not been “proofed” for the future one of two things will happen:

1. The business will not attain its full potential, or
2. The business will fail

Business failure has been written about and researched many times and the underlying causes are usually a combination of factors, some of which are psychological. Unfortunately there has been a preponderance of work on failure and not enough on success. In this report we will look at the reasons for business failures, the current economic climate and will conclude with how to make a business succeed.

Business failures

There have been many studies on why businesses fail and why some businesses do better than others. The main cause of problems in businesses are the following in order of the popularity of publication:

1. Insufficient planning – every single report places it as one of the top problems
2. Lack of capital or the wrong application of it
3. Inadequate financial control – cash flow and costs
4. Inadequate management of growth
5. Inexperience in the product  and in management
6. The inability to maximise staff potential
7. Outside factors such as not reading the trends or the economy slowing down

A very significant study was done by Robert N Lussier titled: “A non financial business success versus failure prediction for young firms”, which listed most of the above and more, but they applied statistical analysis models to the research and found that the two most significant differences between successful companies of comparable size and industry were:

1. Planning – Successful companies tend to develop more specific plans
2. Successful owners or executives used the services of professional advisors more than those companies that would fail. – Because it is never just one of the issues, that cause failure, but always a combination of them, having good advisors or consultants as part of the team helps the business owner to see issues which he would not have seen because he is so busy running the business.

 Current economic indicators

A deputy governor at the South Africa Reserve Bank seems to be convinced the country will come out of its recession later this year. This is what some of the economists and commentators are saying:

“They expected that manufacturing activity was making a spectacular recovery after the latest purchasing managers’ index (PMI) showed that factory output had jumped from 39.3 to 48 last month – its highest level since May last year. This also was the second biggest rise in the history of this index.  Once it passes the 50 mark, manufacturing – the second largest sector in the South African economy – is back in positive territory.
New sales orders also shot up into growth territory, having risen to 50.7 from 39.5. Business activity surged to 49.4 from 38.3 and the inventories index climbed from 37 to 47.7
This has prompted at least one economist from one of the larger financial institutions to comment that this news reinforced “our expectation” that the recession in South Africa had ended during the third quarter and that growth would follow in the fourth.
However, there is also considerable scepticism. Some say the longer term outlook for manufacturing remains uncertain. Big institutions such as Standard Bank remain cautious.
“The manufacturing sector is showing encouraging prospects for improvement over the next several months. However, we remain cautious over the ability of the sector to improve substantially owing to the smaller prominence of consumer goods producing sectors,” was the cautious tone in a research note released by the bank.
Meanwhile, the International Monetary Fund has predicted South Africa’s economy would shrink by 2.2% this year and would expand by 1.7% next year. The South African Chamber of Commerce and Industry said in a recent review that the local economy’s bleeding had slowed, but nonetheless also sounded a cautionary note to business and investors.
So much then for the good news, which was followed by news that private sector credit growth reached its slowest pace in 40 years in August; Standard Bank’s Residential Property Gauge announced that a quick turnaround in the housing market was “improbable”; the FNB/BER consumer confidence index fell by three points in the third quarter with only a slight majority of South Africans expecting an economic upturn any time soon; South Africa’s trade balance slipped back into the red in August after three successive months of surpluses.

The sharp fall in exports is being blamed partially on the strong rand and partially on ongoing weak global demand.
Confidence among civil engineering contractors, as monitored by the South African Federation of Civil Engineering Contractors, has fallen for the first time since 2003 to below 50 on an index of 100, and they are expecting a contraction of 10% next year. It is clear there has been hefty over reliance by the government on the R787-billion infrastructure investment programme.

And figures released by the National Association of Automobile Manufacturers of South Africa and Associated Motor Holdings show that while new vehicle sales increased slightly by 6.1% compared with August, the market was still in decline of 19.5% when compared with September 2008.
But the South African Reserve Bank’s deputy Governor Daniel Mminele believes that based on the composite leading business indicator, which has been increasing for the last few months, we may emerge from recession later this year. However, he adds “there is uncertainty as to the strength of the anticipated recovery.”
According to Mminele, manufacturing appeared to be recovering while business and consumer confidence are rising.
Earlier, Rand Merchant Bank said in a statement it expected the economy to emerge from recession by the end of the year, but that the recovery will be weak, with both consumer demand and private investment largely out of action.

Last month, the Financial Mail reported that it appeared from economic data and market movements “in the US, Asia, most parts of Europe and some emerging markets – that the global recession is drawing to a close”.

It further said that “as long as the global economy stays on the recovery path, the consensus is that South Africa will return to low but positive growth in the third or fourth quarter of 2009”, adding that, ”encouraging is that South Africa’s leading indicator, compiled by the Reserve Bank with data from surveys, share prices and South Africa’s main trading partners, has now climbed for three successive months”.
Also adding its voice to the chorus of optimism is the Treasury. Director-general Lesetja Kganyago has been quoted as saying South Africa will come out of recession in the fourth quarter of this year, but that recovery is likely to be slow. Bear in mind, however, that the same Treasury was telling South Africans six months ago they had no need to worry: South Africa would escape a recession with its infrastructure programme, sound banking system and healthy government finances.”

Conclusion – how to make a business succeed

 Irrespective of what the economists say, the future of a business depends on the mindset and application of the owner of the business. If the owner thinks that the bottom has fallen out of his world, then it has. He will not succeed and the business will go down for many of the reasons noted previously. If however the business owner sees this as “opportunity time” then he will be able to capitalise on whatever opportunities are available. It is obvious though that some processes must be in place for the business to work. These are:

• Plan properly. Your plan must be strategic in that it has to cover your positioning and your high level direction. It must also be tactical and operational, dictating actions to be taken over a 5 year period and who is responsible for those actions and the results there of.
• Ensure that you have good advisors on board. One of the reasons why large corporations are large is that they have a board which brings many differing views to the table.
• Have the right capital to do what you need to do. This also includes other resources such as skills and intellectual property.
• Your financial controls must be in place to cover cash flow and costs in particular.
• Be prepared for growth. If it is not part of the equation, you will not plan for it and it will not happen
• Experience is a crucial factor. Statistically, retired executives of large organisations are more successful at starting businesses than those who do not have that kind of experience. This is easily overcome by the business owner educating himself, or better still if he brings advisors on board who can help in the fields that he lacks.
• Staff plays a crucial role in any business and the implications in a small business are more pronounced than in a large organisation. Some form of performance management system needs to be in place. Having said that, unless there is a culture of performance in the business, it will not work.
• Outside influences play an important role in any businesses future. Trends have to be read correctly, economic conditions must not catch you by surprise. Again, planning and advisors help in this area.
• Notwithstanding the above, it is tough out there. Businesses need to have an approach that says “I see the problems, I know my strengths and weaknesses and I am going to plan for the future that suites my business. This is almost a military approach and I invite you  to:

 

 

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