Recently in Learning from Failure Category

In the last year running our healthcare company, we had a major hurricane and one of the worst ice storms in North Carolina history both within about five months.  While we survived this double whammy, many small businesses did not.  Ever since then I have tried to warn small business owners about the need to prepare for disasters.

Be it floods, like we just experienced here in Nashville, terrorist attacks, hurricanes, ice storms, and so on, small businesses are much more vulnerable to the impact of such events than larger corporations. 

There are steps that an entrepreneur can take to prepare:

1. "Cash is King". There is no better tool to weather a disaster than cash. Having cash reserves allows businesses to make it through the initial economic paralysis of a major event. Thirty days cash reserves (enough cash to cover essential and fixed expenses) would be my minimum recommendation. Even ninety days of reserve would not be too much to have at this period of time. One business owner recently told me that the new goal that many are setting is six months of cash on hand.

2. Manage overhead carefully. Overhead pushes the breakeven point of any business higher. If sales suddenly drop off for an extended period of time, a lower breakeven point that results from lower overhead expenses can soften the impact of any economic shock. It takes less recovered sales to get back to breakeven.

3. Avoid fixed, long-term commitments. Any major shock on a market may require new business tactics, strategies or even models going forward. One reason that the American auto industry reacted so poorly to the oil shock in the 1970s is that they had built their businesses assuming a very static business model. It literally took them years to undo this model and adjust to the new reality that they faced. They had to be able to react much more quickly to changing customer preferences, and operate in a market with many new competitors where there used to be only three.

4. Build in flexibility. Understand that you may need to quickly undo some decisions. Make this as easy as possible for you to accomplish.

5. Watch and manage your inventories carefully. Certainly you should not choke your business growth, but don't go overboard with purchasing either. Purchasing raw materials or other inventory using volume discounts may not be wise. Be as "just in time" with your inventory as possible.

6. Create contingency plans. These need to be major plans for how your operations will be handled given a variety of scenarios, and minor plans that deal with the day-to-day safety and security of your employees and customers.

7. Look ahead. It is critically important to try to look beyond any single event, no matter how devastating. Believe in yourself, your business, and the system that makes it possible. Entrepreneurs need to be bold leaders. As we saw here in Nashville after the flood, the best leadership will not come from the politicians. Instead, it will come from the grassroots of our economic system. Be strong, be brave and be confident and others will follow.

There are some excellent resources for small business owners for disaster planning. The SBA has a new website called Prepare My Business that offers information on planning, education, testing your key systems, and disaster assistance.  And American Express OPEN has a new tool called InsuranceEdge to help assess the right insurance you need to protect your small business.

Every small business owner (and homeowner, for that matter) should heed these words from the SBA:

Ask yourself: what if the worst happened? How would it affect my business and my family? Would we survive if the business were closed down for weeks, months, or perhaps my entire revenue season? What can I do to make sure we survive?

Be a little pessimistic now, and assume it CAN happen to you. Develop a Disaster Plan for your home or business now so you can rest a little more easily in the future.

The SBA estimates that 25% of small businesses never reopen after a disaster, while other estimates run as high as 40-60%.  The better prepared you are, the better your chance to be on the right side of those statistics. 

My students learn very quickly that my favorite source of material to teach from comes from my missteps and mistakes.  Gregory Go and Glenn Stansberry have pulled together a collection of 101 mistakes from a multitude of entrepreneurs at American Express OPEN.  Here is how they describe their motivation for this this effort:

Let's be honest: running a small business is not an easy task. Especially in an economic downturn. Small business owners are keenly aware that mistakes can be very costly at this point in time.

Yet in order to have success, at least a few mistakes have to be made along the way. It's a part of building and growing. Oscar Wilde once said 'experience is the name everyone gives to their mistakes.' And even the most successful business owners have had their fair share of blunders.

Indeed!!  I shared a couple of my own mistakes -- or should I say "shared my experience" -- with them for this collection.

We already know that higher tax rates decrease the rate of entrepreneurial start-ups in an economy.  My friend and colleague John Wark passed along a post from TaxProf Blog that cites a recent study by Rafael Efrat, of California State University-Northridge suggesting that taxes are also a culprit in small business failures, as well. 

TaxProf Blog offers this quote from the conclusion of the study:

Consistent with the growing tax burden on small-business owners, as well as the growing body of evidence linking higher tax burden with limited entrepreneurial growth and higher closure rates, this study has found that tax problems constitute an important reason for bankruptcy filings for a sizable number of entrepreneurs. Interestingly, those entrepreneurs that attribute their business collapse to tax problems do not come from disadvantageous background. Instead, the average entrepreneur in the bankruptcy sample that has faulted tax problems for his financial woes was typically older male, white, native-born, well-educated and an experienced business owner. Nonetheless, the typical entrepreneur with tax problem in the bankruptcy sample was facing enormously higher debt burden with more than five times as much debts as other entrepreneurs in the bankruptcy sample.

I have not written about a golf metaphor for entrepreneurship in quite a while, but the US Open from this past weekend offered an important lesson.

No matter how good you are or how well you prepare, there are certain things that can happen that are totally outside of your control.  The golfers who got the bad end of the weather this past weekend at the US Open experienced this first hand.  Some of the golfers played their early rounds in constant rain and windy weather.  Others, due to their tee times, played with little or no rain -- just a soft and receptive course awaited them after the rains ended.

Was this fair?  That is not the point.  It is, as they say, what it is.

I tell my students that we can help them manage about 80% of the causes for failure in their businesses. 

About 40% of failure happens because the entrepreneur jumped into a business that was doomed from the start.  They did not properly assess the opportunity prior to launch.  Rather, they impulsively moved ahead with little forethought. 

About 40% of failure happens because the entrepreneur is not ready for success once it happens.  Growth is a dangerous time for a small business -- just ask any banker.  If you are not prepared to properly manage and develop your business as it grows, you will soon join the legions of entrepreneurs who failed due to their own success.  They did not create the systems, grow the team, or secure the resources necessary to deal with the growing pains that sink so many promising ventures.  We try to prepare our students with the skills and knowledge to manage their growing ventures successfully.

But then there is that other 20% of business failure.  This failure comes from what you cannot predict nor plan for.  Call it uncertainty, risk, or just bad luck.  Sometimes things happen to even the most skilled and prepared entrepreneurs that are totally outside of their ability to manage. 

My favorite example of this is an old diet supplement that used to be on the market -- it was called Ayds.  The product was growing nicely until a deadly disease with the same sounding name crept into our consciousness -- AIDS.  The sales of the product plummeted.  The spread of a deadly disease with a similar sounding name is nothing that could have been predicted, and there was very little they could do to adjust in time once people stopped buying the product.

This is why I put the Serenity Prayer, or as I call it the Entrepreneurs' Prayer at the end of most of my syllabi for my classes:

GOD, GRANT ME THE SERENITY
TO ACCEPT THOSE I CANNOT CHANGE,
THE COURAGE TO CHANGE THE THINGS I CAN,
AND THE WISDOM TO KNOW THE DIFFERENCE

The Toronto Star (thanks to my graduate assistant Joe Ormont for finding things like this one!) has an interesting article about signs of trouble that small businesses should be watching out for:

Financial: Are you struggling to make payments like rent? Is it hard to buy inventory? Are you taking on more debt than you're comfortable with just to keep the business going? Is your banker worried when he reviews your statements?

Customers: Is there a decrease in repeat business? Is there an increase in customer complaints? Are their lawsuits from customers?

Employees: Is employee morale diminishing? Are key employees leaving? Are departments fighting with each other?

However, I don't really agree with the author's comments that follow these quick and dirty diagnostics -- might be time to shut down the business.  I would suggest that these are opportunities to right the ship.  But, I guess that is the difference in outlook between an entrepreneur who is a blogger and a journalist.... 

Over the years I have become more comfortable using my missteps and failures as lessons and examples for my students.  Of course, they seem to love to hear the success stories.  But they need to learn that hardship, challenge and failure all teach us important lessons about our business, our customers, and ourselves.

Bill Hobbs sent along a good post from The Executive Update that speaks to learning from failure.

[W]e tend to live in an avoidance society, where failure is often overlooked or ignored and we only focus on successes. That's a mistake. Leadership comes from learning lessons taught by failure. People rebound from failure because they choose to learn from their mistakes.

Well said.

Barry Moltz's long awaited second book, titled Bounce, has finally arrived. From his website:

Conventional business wisdom tells us that there is always something to learn from failure. Not true--sometimes it just stinks! Failure that offers no real learning value becomes a big jolt to the basic business belief system.

Barry's gift is that he uses humor to offer lessons that all entrepreneurs can learn from. During his last visit to Belmont, Barry offered some glimpses of what he planned to explore in his new book. Just like with his first book You Need to be a Little Crazy, this book is a must read for entrepreneurs at any stage of their development.

Barry demonstrates that developing the resiliency to 'bounce" through these cycles determines who ultimately will succeed. Using real life business examples, he shows that with true business confidence, we can face our fears, let go of shame and failures, use all our choices, be better risk-takers, and define our own brand of success.

Barry offers advice on how to use the potholes, detours, and wrong turns along the road that is our our entrepreneurial journey to reach our ultimate goal of entrepreneurial success.

I wanna thank everyone who ever told me no, Pack it up and get back home, It kept me going knowin' I would prove them wrong. Yea I knew it all along, Without 'm I might have given up a long time ago, and so, I wanna thank everyone who ever told me no.

Buddy Jewell

Because we live in Nashville, I am often reminded of how much failure goes into creating success. From the outside, it seems that music stars just suddenly appear on the scene. The truth is that for most of them it took years of hard work and many, many failures to finally find success.

The same is true for entrepreneurs. Most highly successful entrepreneurs will tell you that along the road to success in their businesses they were often on the brink of failure. But they persevered. They found a way to make payroll. They found a way to make that critical sale. They found a way to keep the wolves away from the door just long enough to make it through the tough times. They found a way to pick themselves up from a business that did not succeed and move on to the next one that might. As Thomas Edison once said, "Many of life's failures are people who did not realize how close they were to success when they gave up."

Our culture seems to be drifting into an alarming view of success and failure. We seek quick or even instant success. I see it in entrepreneurs who look at their businesses as deals to yield a quick, short-term windfall rather than as a sustainable source of income and good jobs. We seek our fortunes through lotteries and lawsuits rather than hard work.

We also try to protect ourselves from any adversity or failure. There are the "helicopter" parents who hover over their offspring trying to shield them from any chance of failure, even as these children become young adults. We have politicians who have created the illusion that government is there to protect us from any harm and to rescue us from all adversity. America has become a society of people who blame everyone and everything else for our own failures.

We seem to have forgotten that failure, in fact, builds character. And it is the fear of failure that inhibits creativity and keeps us from learning.

Don't be discouraged by a failure. It can be a positive experience. Failure is, in a sense, the highway to success, inasmuch as every discovery of what is false leads us to seek earnestly after what is true, and every fresh experience points out some form of error which we shall afterwards carefully avoid.

John Keats

You will fail. Failure is a prerequisite for success.

I invited Bobby Guy, a local attorney with Waller/Lansden here in Nashville, to speak in my MBA class last week. While it may not seem that unusual or blog-worthy to mention that I had a lawyer in my class, it is his area of law that makes his visit unusual. For you see, Mr. Guy practices bankruptcy law. How often do entrepreneurs get to hear from a person who understands business failure from the inside before they start their ventures?

From this perspective, Mr. Guy clearly has a very instructive message for entrepreneurs. He likes to give a talk called "A View From Down-Under: The Top Ten Reasons Companies That Should Make It ... Don't."

And here are his Top 10:

10. Over-expansion. The need to get there first or to demonstrate revenue growth to anxious investors leads businesses to grow too fast.

9. Poor Capital Structure. Companies take on too much debt....Enough said!

8. Failure to Control the Controllable Costs. Businesses spend down the initial cash before it is flowing in at a positive rate.

7. Failure to Prepare for Volatility of Uncontrollable Costs. For example, energy, materials, labor, or insurance.

6. Add New Products or Divisions that Drag Down the Profitable Ones
5. Poor Internal Controls and Execution -- customer service, accounting controls, theft, fraud

4. Poorly Designed Business Model

3. Reliance on Critical Financing that Dries Up

2. Failure to Adapt to a Changing Market

AND THE #1 REASON? Management in Complete Denial......

Rob at BusinessPundit suggested a post at The Occupational Adventure about failure. It is worth a look. Failure, or the fear of failure, is what has kept many a potential entrepreneur on the sidelines. Failure is something we all have learned from along the way if we let ourselves take some risks. It reminds me of the first time I really got tackled hard in Junior High football. I was really afraid of how it would feel, and although it really did hurt (the guy was the star line backer of the eighth grade team), I learned from it (stay away from his side the rest of the game and go out for cross country next fall).

We can all learn from our own failures. That is an important part of entrepreneurial learning. We can also learn from the failures and mistakes of others (I picked that up and a young age being the youngest of four boys--thanks for all the lessons on what not to do Tom, Scot and Steve). Some of my best lectures center around mistakes and failures I had in business and how I tried to learn from them going forward.