Business Finance Basics

“Flawed Business Logic Ultimately Leads To Business Failure”

Have you ever heard a business owner say they acquired asset or entered a market for “strategic reasons”?

Or what about businesses that are build on the foundation of subsidies and market protection schemes?

As one of my old mentors used to tell me, if what you want to invest capital in isn’t profitable then its not very strategic.

As I was reading an article on the failings of Ontario’s Green Energy Act ( here’s the article link … http://opinion.financialpost.com/2011/05/16/ontarios-power-trip-the-failure-of-the-green-energy-act/ ), which by the way is not only quite informative but also written to entertain, I couldn’t help thinking about how this type of misguided approach applies to so many small business failures.

Any time there are any artificial supports present in the market that hold your position or even allow you to compete in the market or cause the market to even exist in the first place, over time the outcome is not likely to be very good.

Even if you’re not dependent on subsidies or some form of industry price protection, market access, etc., there are other things to consider.

For instance look at the Canadian manufacturing sector where may of its members built a business on a $0.75 Canadian/U.S dollar ratio.

But what happens if the dollar moves to parity as it has done before in the past?   Not likely going to happen.  Right?  Wrong.

Instead of getting costs inline to be able to protect against such a movement in a highly dependent variable that makes or breaks the business, many companies choose not to and as a result are out of business today.

And the great thing about the last example is that while the dollar is at $0.75 and you reduce your costs to be able to compete at par, the short term upside is that all the cost savings are profits.  Not a bad incentive to making sure you’re competitive.

When I was in the corporate world, the business movers and shakers would always be selling us finance guys a load of crap in terms of their market assumptions for key investments they wanted to make.

As the finance guy, my job was to be the counter balance to the hype and try to ascertain if we were trying to build a foundation on sand or stone.

When the numbers didn’t materialize, costs are now higher, and profits are lower and if that ends up killing you or your project, the next guy comes along and buys the assets at their true market value where money can be made.

Creating any type of business or growing an existing business that is not designed to be competitive on some scale does not make any sense, period.

Sure, you may be able to get away with taking such an approach for a period of time, but in the end things are going to come apart.

The problem for many small businesses is that if it doesn’t come apart in the first generation of owners, its only a matter of time until the next generation or two takes the hit.

I guess one can rationalize that you don’t care if everything falls apart when they are retired or no longer dependent on the business for financial returns.  But I say that’s pretty short sighted and a very opportunistic way of thinking, and then when things do blow up, the same business owner starts yelling fowl and want a new form of support to replace their lack of business finance fundamentals.

Getting it right can take some work.

But the alternative is too much like gambling which, in my opinion is why there is such a high level of SME business failure.

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About the Author Brent Finlay