How To Manage Your Business Risk & Prevent It From Failing & Dying

Major Points of the Article

• There is a very high failure rate in business with barely any reaching the 10-year mark in Australia.
• Failure is caused by both internal and external forces acting on your business.
• To prevent your business from failing a Pre-Mortem Evaluation is a strategic exercise that can help you prevent your business from failing.

You most likely know that with all businesses there is an element of risk that it will fail, close, shut down, or become insolvent. In fact, as high as 70% of all businesses will fail before they reach the 10-year mark. That is a huge failure rate and to prevent your business from doing the same read on to learn the strategic way in which you can help your business.

Which Forces Will Affect Your Business

When it comes to the failure of a business, it is usually caused by one or both sets of forces. These are:

1. Internal Forces
2. External Forces

And, while some forces are in your control, others are not. It is therefore up to you to create contingency plans and action plans to either prevent the damage from occuring or to take advantage of the situation (i.e. a growth opportunity). It is all about how you frame it, and how you respond to the situation.

But before we move on to developing the strategies, you must become more aware of the forces.

What Are The Business Internal Forces?

When you reflect on these forces, you need to look inside your business. In particular, the finances, operations, people, etc... In fact, there are 5 of them that could affect your business.

1. Finances: These forces are related to your cash flow, loans, investors, and even your potential investors. Essentially, your business must be sustainable and profitable.
2. Physical Resources: The size and exact location of your premises will affect your operations. In particular, your location might need to be close to natural resources, your equipment eventually will need repair/fail, or your facilities could become too small.
3. Intellectual Property: These are your copyrights, trademarks, and patents. In particular, patents only have a 20-year lifespan and without preparing for that patent to expire, your whole profitable business could lose its market share due to generic manufacturers.
4. Employees: The staff that work for you are invaluable as they serve a vital function in your business. However, employees quit, leave for a competitor, have children, retire, and even die suddenly, leaving your company potentially stranded.
5. Volunteers: Not all businesses have volunteers, but some employees volunteer their time to do things outside of the job description. Without the volunteers and your staff volunteering their time, a business can suffer.

What Are The Business External Forces?

When you reflect on these forces, you need to look outside of your business., but also consider that these forces are out of your control. In fact, you will need to either prepare for them or potentially attempt to enact change... There are 9 of them that could affect your business.

1. Economic: The economy plays an important role in every aspect of daily life. From the well-being of the personnel to the ability of a company to grow, your business will be impacted. Moreover, the inflation rate could rise affecting your interest rates while decreasing consumer spending. If this occurs, it could alter your profitability to become insolvent.
2. Political & Legal: These change frequently, and in some instances could prevent you from selling a profitable product or service. For example, acceptable toxicity levels could change, rendering your product illegal to sell.
3. Competition: The introduction of new entrants can severely alter your market share, especially if they have a "better" product than yours.
4. Technological: Related to number 3, technology is continuously improving. What was available today, may not be tomorrow, and similarly, the consumers will want the latest technology. Just look at what happened between Blockbuster and Netflix. But more recently, the barriers to entry have been reduced, creating a flood of competitors (i.e. consider the barriers to entry).
5. Social: The what, where, and why of the people that leads them to make a purchase. This is mostly related to your marketing and how you communicate to your consumers.
6. Global: When selling domestically and internationally, the consumer's cultural norms are different and do change. Being aware of these nuances is most important to prevent brand damage. For example, McDonald's famous Big Mac is not sold in India as it is made of beef. In fact, they have a completely different menu.
7. Demographics & Psychographics: The target market of your consumers will change as people will get older, and their values evolve. What they want today, may not necessarily be what they want tomorrow.
8. Ethical: The ethics and morals of your consumers will change. The right thing to do today, may not be tomorrow. For example, we have seen this in farming as caged eggs are being phased out.
9. Natural: Consumers have become more concerned with the environment, which has increased demand for recyclable and biodegradable products. Essentially, people want to buy from companies that value sustainability.

What You Should Do Next - A Pre-Mortem Evaluation

Now that you are aware of the various forces, it's time to do a Pre-Mortem Evaluation.

Similar to a Post-Mortem Evaluation, like you would see in a crime TV show, instead of determining how it died, you will determine how it could die. Essentially, roleplay/imagine future scenarios and how they could possibly affect your business in a negative way. When you do this, focus on the various forces mentioned above in relation to your business.

Once you have established the various ways it could die, you can then begin to explore and plan your contingency and action plans as a way to be proactive and prevent this possible future from happening.

For example, you may determine that one of your key staff members who generates more than 60% of your revenue is going to retire in 1 year. This will create a massive financial hit to your company, however, because you have done your Pre-Mortem Evaluation you have realized this early. Meaning you can now put an action plan in place to prepare for their retirement.

How Often Do You Need To Do This?

At least once a year, as your business and the world keeps changing. However, sometimes because you are the business owner, it is hard to be a critical thinker, leading to the main thought of "it'll be alright". But often, that is not the case. To get a comprehensive Pre-Mortem Evaluation and a long-term business growth strategy you need to consider external consultants.

Reach out and let's have a chat to explore the growth of your business.