What Happened to My Business?
January 2011
Overview
Every year, millions of new businesses declare bankruptcy; in fact, the majority of new businesses fail within five years. For a business to thrive, it should have the following four components - a vision, a strategic plan, an operating plan, and a financing plan. This article summarizes the common pitfalls awaiting the new business owner and explains the key actions needed to avoid these problems and build a sustainable business.
Background
There are over two million companies in the world big enough to be tracked by the big business information services, such as Standard & Poor’s and Dun & Bradstreet, as well as millions of smaller businesses. The total revenue generated by these companies is about 53 trillion dollars per year, which is over 91% of the global gross domestic product, currently at 58 trillion dollars according to the CIA Factbook. These companies employ millions of people around the world, although a lack of transparency makes the exact numbers difficult to ascertain as the corresponding data are unavailable.
The following chart provides the pertinent information for a representative sample of these large businesses. It includes the number of operating companies in each major geographic region of the world, as well as the annual revenue generated by these operating companies and the number of employees of each.
| Global Statistics for Reporting Companies | | | |
| Geographic Region | Operating Companies | Revenue ($mm) | Employees |
| United States of America | 185,479 | $ 17,320,530 | 40,147,419 |
| Europe | 46,501 | 10,612,093 | 77,698,783 |
| Asia / Pacific | 32,673 | 13,252,804 | 47,332,914 |
| Africa/Middle East | 6,307 | 1,536,132 | 3,903,746 |
| Canada | 4,918 | 1,750,966 | 5,563,282 |
| Latin America and Caribbean | 1,970 | 2,062,460 | 5,954,212 |
| Total | 277,848 | $ 46,534,986 | 180,600,358 |
Source: Public global business data services
Every year, many of these large companies as well as countless smaller companies declare bankruptcy. This article illustrates the issues involved, and will provide advice on how to hurdle the obstacles facing the new business owner.
The Issues
The global gross domestic product is currently estimated at 58 trillion dollars and about 24% of this amount is generated in the United States alone. According to the Small Business Administration, over 50% of new businesses fail within five years of inception. There are several reasons for this, but virtually all of them result from a lack of foresight and can be traced back to the vision, the strategic plan, the operating plan, and the financing plan.
A close look at the bankruptcies reveals that large, established companies are not necessarily immune. The following graph represents a small sample of the companies tracked by information services, such as Standard & Poor’s and Dun & Bradstreet.
It shows that even big businesses are susceptible to the effects of a weak economy, as illustrated by the large increase in companies declaring bankruptcy in early 2009, coinciding with the economic downturn. As the economy improved, the number of bankruptcies steadily decreased since the third quarter of 2009. It is important to remember that large, well-funded companies are vulnerable. In fact, the sheer size of these businesses means that they require even more precise planning than a smaller company that can be kept running on very little funding.
It is also important to investigate what kind of companies are most likely to be forced to declare bankruptcy. The following graph illustrates the bankruptcy count by sector; consumer discretionary goods are the hardest hit in a poor economy, because the general public will cut down on unnecessary or luxury purchases. The Industrial and financial sectors also show high bankruptcy rates, because their success is closely tied with the economy’s ups and downs.
The effects of these bankruptcies are illustrated in the following chart, which shows the five-year sector stock growth. Currently, the only sector not experiencing any growth is financials. While the consumer discretionary goods are hardest hit, the sector rebounds more quickly than financial markets.
Bankruptcy is a very real danger for any new business; especially within the first five years. It is important for every business owner to recognize and understand how critical it is to have all four key components to avoid failure. Vision, planning, execution and funding are all essential for survival.
Whereas most new businesses have a vision, many of them are without a clear plan, fail at execution, and lack adequate funds, especially during the initial start-up phase. This lack of funding gives management no time to recover from poor planning and execution. A proper vision, planning, execution, and funding will prevent these mistakes, enabling a new business owner to build a successful and sustainable business.
The Solutions
The Vision
The first component of a successful business is the simplest; every business must have a vision. The vision should be articulated in a mission statement that encapsulates the expectations and goals of the business. A good mission statement should include both the vision and the core values that guide the company and its employees, serving as the foundation of the business. The vision itself should be clear, compelling and achievable.
The Strategic Plan
The second step to success is the strategic plan, which is a broad framework addressing the needs and direction of a company over the first three to five years. This is where the most common mistakes are made; numbering among them are errors such as an inappropriate location, ill-advised staffing decisions, ineffective marketing strategies, and lack of technological support, such as a website or calling center. Many new businesses also have problems with the structure and direction of the company, such as little to no internal controls and accountability, as well as overexpansion. A successful strategic plan must be clear and specific, containing provisions for all aspects of the business. It must also provide for all eventualities, addressing both the best and worst case scenarios. Keep in mind that a plan must be focused, but flexible. If the situation changes, one must allow for deviations from the proscribed path. It is, simply put, a living document.
The Operating Plan
The operating plan is just as important as the strategic plan; it also must contain clear directions and specific provisions. However, unlike the strategic plan, the operating plan focuses on the actions and issues of the current year, detailing the precise steps to be taken on a month-to-month basis. The most common mistakes at this stage are poor management, lack of experience, hasty or imprudent decisions, and inability to adapt. In order to ensure success, a business owner must follow the operating plan closely, approaching critical junctures with composure and making sure not to deviate from the set policy. This is not to say, however, that one must follow the plan to the detriment of the business; as with the strategic plan, the operating plan must be prepared to adapt to different situations as the need arises. If something changes drastically, a savvy business owner should make the necessary alterations, or if the situation warrants it, a new plan should be constructed. Danger lies in willful abandon of a successful plan simply because the confusion of unexpected circumstances.
The Financing Plan
The final component of a successful business is an effective financing plan. It takes at least five years for most businesses to turn a profit, so a business must be supplied with enough funding to last through the profitless years, with surplus funds for unexpected circumstances. Specifically, a new business must avoid high overhead costs, overspending, and poor credit arrangements. A good financing plan will make provisions for all financial decisions, as well as stress the value of long-term gains over short-term profits.
These four crucial requirements are easily explained, but not quite as easily fulfilled. The vision must be viable and the strategic and operating plans must be effective. The financing plan must include sufficient funding, including reserve funds for unforeseen situations. These four components should ensure the success of any new business.
Interview
In the following interview, George Bickerstaff, co-founder of The Global Leaders, explores the characteristics of a successful company.
Question: Can you give us an example of an effective vision or mission statement?
Answer: Every good mission statement should be clear, concise, aspirational and inspirational. The following companies have effective mission statements that are simple, yet summarize the ethos of the company as a whole.
Facebook - To give people the power to share and make the world more open and connected
General Electric - Imagine, solve, build and lead
Google - To organize the world’s information and make it universally accessible and useful
Harvard Business School - We educate leaders who make a difference in the world
Question: Who should be able to articulate the mission statement?
Answer: Every stakeholder in the company should understand and be able to articulate the goals and expectations of the company.
Question: And how and when should this vision be communicated?
Answer: The vision should be communicated often and to everyone. A good company must have a consistent and clear message, so that everyone involved, from low-level employees to the CEO to the clients, knows what the company is all about.
Question: So, once a company has a vision, what’s the next step?
Answer: Well, the vision is the business dream and that dream cannot be achieved without a plan. The next step is to prepare a strategic plan to highlight the key issues and the actions that the organization must take in order to achieve that dream.
Question: How often should this strategic plan be prepared?
Answer: A good strategic plan should address the first three to five years, but it needs to be updated annually order to incorporate changing information, such as the markets, customer needs and competition.
Question: And how many strategic issues and actions should the strategic plan identify?
Answer: A successful plan will have about ten of each. Less than this means that management has not considered all of the issues or actions to be taken, and more than this is probably not doable and certainly not strategic. These should be considered your “top ten strategic actions”.
Question: Should the operating plan include specific measurements, such as dollar amounts, percentages, and so forth?
Answer: Definitely. As the old saying goes, you cannot manage what you cannot measure. High-level, specific measurements are necessary. For example, a goal could be to increase the market share from 20 to 30% over five years, or to increase the revenue from emerging markets from 10 to 25 million dollars within five years, or to improve quality to less than 0.1% error rates.
Question: How does this strategic plan tie into the operating plan?
Answer: The strategic plan is the broad framework and covers the next three to five years, while the operating plan is the issues and actions that should be addressed in the current year. It is also sometimes called the budget.
Question: Who owns the operating plan?
Answer: Well, the CEO is responsible for the preparation of the operating plan, and the board of directors is responsible for reviewing and approving the plan on behalf of the shareholders. However, key management must be involved in the preparation of the plan and have to completely understand its provisions its order to manage effectively.
Question: How important is it to achieve the annual budget?
Answer: Every great business should plan and achieve its plans with good governance and accounting controls. Clearly, a business should never fall short of its goals, but in a sense it is also undesirable to exceed the parameters of the plan in place, because it means that the plan failed to provide for the circumstances. A good plan should include cover all eventualities.
Question: Now let’s talk about the financing plan. Why is it so critical?
Answer: The financing plan is the key to success. Almost all good businesses fail before they can achieve their objectives - they simply run out of money. A financing plan is essential to ensure the business has sufficient funds and will last long enough to start making a profit.
Question: How difficult is it to create a financing plan?
Answer: Like with the vision, strategic plan, and operating plan, it is necessary to have expert input both from inside and outside the organization. There are as many options to finance as there are different types of companies. It is absolutely imperative to have the best advisors; they should be competent people that you can trust.
Question: How far out should the financing plan look?
Answer: It should look out as far as the strategic plan and operating plan, which is generally three to five years, but under no circumstances should it address less than the next two years.
Question: When should a company raise money externally?
Answer: Whenever it can. Companies should look to external money-raising opportunities whenever the markets let them, and they should always have funding for at least two years.
Question: Finally, what are the different funding sources available to new businesses?
Answer: That’s a great question, but it’s one I’ll hold off on answering for now, as I’m planning to address it in future publications.
Additional Information
For more information, please visit The Global Leaders bookstore, which carries supplementary materials, including detailed versions of the spreadsheet in this article.
Furthermore, each regional group of The Global Leaders provides its members with information and documents specific to that region.
Acknowledgements
Author: George Bickerstaff
George is a board member, investor, partner and trustee for various businesses and philanthropic organizations; he has also held senior positions with companies such as Dun & Bradstreet, General Electric and Novartis. George has been instrumental in establishing the strategic, operating and financial direction for numerous private and public companies and has provided financial leadership in mergers valued at more than $50 billion during his career.
For more information, please visit: http://www.linkedin.com/in/bickerstaff
Contributor: Caroline Tara Frey
Caroline graduated with a law degree from Oxford University in 2009. She is now pursuing her legal career in the United States, having successfully completed the New York State Bar Exam in July 2010.
For more information, please visit: http://www.linkedin.com/in/carolinetarafrey