Business Essay

K.E. McNURNEY,inc.
Interior Plaster & Drywall Construction

Why Do Businesses Fail?

1) The basic idea is wrong.

2) Start-up capital was inadequate.

3) There was wasteful use of capital.

4) A lack of stubborn staying power.

5) A lack of business / financial know-how.

6) A lack of common sense.

7) Inability to deal with a variety of people: suppliers, customers, employees, governmental agencies.

8) Poor pricing of your product.

9) Ignorance of governmental restraints.

10) Taking the completion too lightly.

Which of these is the most common or widely experienced? While subjective my experience in the construction industry tells me it's numbers 2 and 3 (capital problems) with number 5 coming right behind (financial know how).

Too many construction start-ups are emotion based rather than conceived after a detailed study of the market and self examination. I have seen truckloads of construction start-ups go through invested capital (theirs or someone else's) in no time at all. They did not husband limited resources or even bother to budget income and expenses.

Not understanding costs is a shortcoming for most new business owners.

The least understood aspect of business is the cost of labor. Even some long time bosses don't know or understand the true costs.

I used to multiply the salary or wage rate by three; today I'd set the factor closer to four times the "pay". This means that an employee paid $12 an hour is really costing the business $45 per productive hour. For one thing, It's very nearly impossible for any worker - even the boss - to be productive more than 60 percent of the time represented by the paycheck for time "on the job". When all other overhead (rents, utilities, insurance, etc.) are added in and allocated to each hour actually worked (as opposed to put in) the factor of four is a good guideline.

Another blind spot is the relationship of every cost item to revenue. If the goal is to realize a pre-tax profit of 10%, then a $10,000 cost item requires gross revenue of $100,000.

So next time you hear an entrepreneur scoff at a $500 expense, it might be well to ask if there's $5000 in revenue to allow for the scoffing.

Example: That new $40,000 4X4 Chevy pickup truck with big black dog in the back is actually going to cost $400,000 in revenue.

I've always been amazed at how many contractor's sneer at efforts to cut minor costs, like postage or electricity. When a single 33 cent stamp is shown to require $3.30 to $6.60 in revenue, maybe the sneering will stop.

Petty as it may seem, multiply the single minor expense by the number of times it occurs and you're talking real money. Enough to fuel failure and another of the many reasons that business start-ups rarely get beyond six years.

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