Why businesses fail, plus 6 pitfalls to avoid

June 1, 2015 By and    

Any business can be brutal, nonforgiving and ultimately fail to survive.

Despite the general stability of our industry, propane businesses are no exception to the risk of failure. A failed business can leave in its wake lost fortunes, lost jobs, along with the stress and struggle of the owner and employees who fought to save the business. Business failure is usually a slow, painful death.

The propane industry has had its share of failed businesses – both large multi-state marketers and small independents. Each failure has a lesson that can help others avoid the same mistake. These lessons are worth heeding because any business, regardless of its strength or successful heritage, is vulnerable to failure. The following are common reasons propane businesses fail, along with practices to avoid these pitfalls:

Running out of money The ultimate result of business failure is running out of money. This can be avoided with good business planning and proper capitalization. Manage cash flow using an annual forecast. A cash forecast provides valuable foresight. Running out of money should not be a surprise, especially for your banker. To ensure proper capitalization, either hold a rainy day cash reserve or better yet, have a bank line of credit for those tough times caused by factors such as warm winters or high propane supply costs.

Family conflict Only 30 percent of family businesses survive to the second generation and 12 percent to the third generation, according to the Family Business Institute. Conflict in a family-owned business is a common issue among independent propane marketers. One solution to these conflicts includes giving final authority to one family member. Another solution is to remove incompetent family members working in the business who are setting a bad example. A healthy business should be the family priority.

Growing too fast Surprisingly, growing too fast is a cause of business failure. The propane company’s growth discipline must be the rule. Otherwise, growth’s intoxicating effect can lead to overpayment for acquisitions, unmanaged debt and insufficient working capital.

Eroding customer service Peter Drucker’s saying “The purpose of business is to create and keep a customer” should be prominently displayed in each propane business. Propane companies slow to respond to out-of-gas incidents, who cannot be reached by phone or have rude and uncaring employees will rightfully lose customers and will die a slow death.

Ineffective customer billing When the customer is not billed accurately or on time and when the balance due is not collected, higher bad debt and poor cash flow follow, along with unhappy customers. An effective accounting and back-office function is the most underappreciated requirement of a business.

Recognize your back-office employees when the job is well done, but counsel them when problems occur so corrections are instituted quickly.

Ineffective propane pricing A common trait of less sophisticated propane marketers is to price propane without knowledge of costs associated with running a propane business. The cost of financing accounts receivable, trucks and tanks are just three examples. An effective price strategy strives for that “sweet spot” of understanding the margin needed to recoup these costs while remaining competitive and delivering value to the customer. The company’s pricing should be razor sharp.

Every employee has a hand in preventing business failure. The owner must stay actively engaged by providing vision, direction and purpose for the business. If owners do not perform this role themselves, it’s incumbent upon them to ensure that a capable executive be given the responsibility and authority to perform this role so it trickles down to the company’s managers and frontline employees.

The local manager must be able to consistently cast the vision of the owner  to frontline employees. They must also ensure employees are engaged and the customers are served. This job is crucial and difficult.

Frontline employees such as the customer service representative, delivery driver and service technician must understand that their daily interaction with customers make the difference between the company’s success and failure.

Running a successful business is complex and challenging – but rewarding when the job is done well.

Randy Doyle is CFO of Blossman Gas in Ocean Springs, Miss. He can be reached at rdoyle@blossmangas.com.

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