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

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<term business success and I find this ma=or flaw in many of the businesses I provide

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

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<month period. 0eavy start<up expenses and construction cost over<runs have left the firm in a precarious financial position. +ost businesses cannot afford to grow more than twenty percent per year and excessive growth can 1ill a company as fast as inade/uate sales. With economic forecasts being revised downward, it can be reasonably assumed that the financial failure of businesses will increase. ou should ta1e a few minutes to

review the !"even Deadly Business "ins# presented in this paper and see if any if them apply to your clients8 businesses. If they do, corrective action is in order.