Seven Deadly Business Sins

8/13/2019 Seven Deadly Business Sins

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SEVEN DEADLY BUSINESS SINS

By

Professor Dale Eesley

With the economy remaining sluggish, I have recently received a number of calls

from business owners who are experiencing severe financial difficulty. While there are

many reasons for business failure, I have noticed that the firms contacting me have one or

more problems that fall into seven distinct categories. ou may find it useful to compare

your clients situation with the problems I have labeled the !"even Deadly Business "ins#.

"E$E% DE&D' B("I%E"" "I%"

). Pricing too 'ow

*his is the single largest problem I have found with the businesses that have

contacted me recently with financial problems. +ore than half of the businesses

had a gross profit margin that decreased when measured over the past three years.

*he owners typically felt that they could not increase prices due to the slow

economy or their costs had increased without a compensating increase it the price

of their product or service. & good example is that of a *oledo manufacturer who

watched his gross and cash flow position deteriorate. I an attempt to remedy the

situation, he signed a contract with a mass distributor of his product at an even

lower gross profit margin.

our clients must price to cover your costs and to maintain their gross profit margin

-. Excessive perating Expenses

&lmost a third of the businesses with financial difficulty had ade/uate sales and

prices for their industry. 0owever, an analysis of their financial statements


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revealed that they were overwhelmed by excessive operating expenses. *he

excessive expenses were generally in all cost categories and this situation was

slowly 1illing the business. & *oledo based service company had leased

expensive space and added coordinators and other indirect personnel who were

not generating revenue for the firm. *he cumulative total of these expenses

eroded the historical operating profit margin of the company.

2adical cost cutting is re/uired when survival of your clients business is at sta1e.

3. Excessive wner 4ompensation and Expenses

&lmost twenty five percent of the businesses were in financial trouble because the

owners had over compensated themselves and5or had extravagant personal

expenses charged to their business. & 'ucas 4ounty business owner called in a

panic recently when his ban1 refused to extend his credit line. &n analysis of his

boo1s revealed that he had increased his salary by 367 two months previously.

In addition, his wife was drawing a salary and two of his children on school

vacation were employed by the firm. 0is personal expenses charged through the

firm were also up and the total of these additional expenses simply erased the

company8s normal profit margin.

When losses begin to occur, personal expenses and owner compensation must be 1ept to

a minimum.

9. 'ac1 of :ood ;inancial 4ontrols

&ll of the businesses contacting me with difficulties recently have had inade/uate

financial controls. :ood financial control systems are essential for long


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advice to. & *oledo business owner recently contacted me concerned about the

profit performance of one of his offices. Because multiple office expenses were

recorded in aggregate, it was impossible to determine where the problem was

originating without first reconstructing all of the firm8s financial records. *his

business owner did not have the information needed to ma1e the decisions

re/uired to correct the situation.

our clients must have the financial information necessary to ma1e informed business

decisions.

>. Inade/uate Inventory 4ontrol

& business cannot be profitable if it does not have an appropriate level of

inventory. If inventory turnover is too high, a firm might have too little inventory

to generate consistently profitable sales. If inventory is too high, or if the mix of

inventory is not right, the firm will not generate needed profits to cover the cost of

carrying the inventory. & 'ucas 4ounty retail business owner called me because

profits continued to be too low even after drastic cost cutting had ta1en place. &

visit to her store revealed that inventory was inade/uate and potential customers

were leaving her store without ma1ing a purchase due to poor selection and empty

shelves.

;inding the right inventory level is difficult and re/uires a good control system of profits

are to be maximi?ed in a business.

@. Poor 'ocation

;or many retail and service businesses, good location is the most important

success criteria. *he best management cannot ma1e up for poor location for


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many of these firms. & *oledo retail store is located at the far end of a popular

retail shopping street. ;oot traffic for this business is very important and its sales

are suffering because of its less than desirable location.

If location is important for your clients business, compare their sales per s/uare foot with

the average for their industry. If their sales are lower than the average for their industry,

you should evaluate the suitability of their location.

A. :rowing too ;ast

+any businesses that experience success rush to expand while the mar1et

opportunity still exists. 0owever, growth re/uires cash and you must be certain

that your client will generate funds sufficient to meet their growth plans. & 'ucas

4ounty restaurant was very successful and generated very high profits during its

first two years of operation. Based on this performance, the owners embar1ed on

an ambitious expansion plan that included opening four new stores within an

eighteen

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Seven Deadly Business Sins