6 Most Common Reasons Businesses Fail – Part 5

by Brian on April 27, 2010

Over the past couple of weeks we’ve been looking at the 6 Most Common Reasons Businesses Fail.

There are tons of reasons why businesses fail, but these 6 reasons are the ones that I’ve seen time and time again in my career.

If you need to catch up on 4 earlier post, check out

  1. Lack of a Common Goal
  2. Bad Hires
  3. Keeping Information Departmentalized
  4. Treating Employees Like Children

# 5 Not Knowing Cost

Understanding cost is something a lot of small businesses completely fail at, especially service-related businesses.

So we’re going to look at 2 types of businesses: Tangible Product and Service Providers.

Below are 2 great BASIC exercises to help determine costs.

This will at a minimum get you into a, “I’m going to determine my costs,” mindset.

Tangible Product Businesses

Take the average number of units sold in 1 day and add together all of the following:

  • Wholesale Price
  • Shipping (to your facilities)
  • Storage & Facilities (take your annual rent, utilities, office supplies, etc. and divide that number by 365)
  • Marketing (take your annual marketing budget and divide it by 365)
  • Wages (take the combined annual wages of everyone and divide that number by 365)
  • Shipping (to the customer, if you include free or discounted shipping)

Service Providers

Take the average number of orders sold in 1 day and add together all of the following:

  • The number of hours it takes to provide the service
  • Facilities (take your annual rent, utilities, office supplies, etc. and divide that number by 365)
  • Marketing (take your annual marketing budget and divide it by 365)
  • Wages (take the combined annual wages of everyone and divide that number by 365)
  • Transportation (if you have costs related to providing the services to the consumer)

Note: these calculations are for businesses that are open 7 days per week. If your business is only open 5 days per week, substitute 260 for 365 days.

This should give you a pretty good understanding of your cost of doing business. Compare these numbers to your average daily revenue to help determine the health of your business.

Are you making enough profit? If not, what are some areas you can improve upon?

Can you negotiate better shipping rates? Is there a way to reduce your utility bills?  Are you getting the best deal on your office supplies?

Which of your marketing programs are most effective? Least effective?

If you cut one area of marketing, that does not mean you should cut your marketing budget. You should take the money allocated for the least effective marketing method and add it to the current allocation for the most effective marketing method.

After you have made cost reductions, go through this exercise again and compare your costs to your revenue.

If you still aren’t making enough profit, maybe you need to take a look at the pricing structure for your product or service.

How are you priced in comparison to your competitors? Is there room for a price increase without losing customers?

Another huge cost factor is employees or lack thereof. If a business has too many employees it’s an obvious huge cost. On the other hand if a business has too few employees; they won’t be able to accomplish everything that needs to be done to realize maximum profit.

Is it more cost effective to hire new, terminate existing or to outsource employees?

This exercise is by no means meant to be all inclusive.

Hopefully this exercise will get you thinking more about the costs related to doing business.

How do you track costs in your business?

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