What the Turnaround Ace Knows

George Cloutier talks about how entrepreneurs can avoid startup pitfalls and set their companies up to profit right from the start

By Karen E. Klein

In his 21 years as a business turnaround expert, George Cloutier, founder and CEO of American Management Services, has seen just about every kind of business failure imaginable. After reviewing 6,000 companies in hot water, Cloutier says, he's concluded that 90% of failures are due to bad management.

Business owners who are lax, unengaged, fearful, or in denial will never run successful companies, he says. Cloutier spoke recently to Smart Answers columnist Karen E. Klein about how entrepreneurs can avoid startup pitfalls and set their companies up to profit right from the start. Edited excerpts of their conversation follow.

Why do businesses fail?

Because they don't make a profit. Profits aren't everything—they are the only thing. With 90% of our clients, we install a cash management system. They don't have cash flow plans, and they don't budget.

Let's say your company's going to make $100,000 a year, or $1,400 a week after taxes. You put that amount on a spreadsheet, and you work up a budget. It's not that tough.

Yet most business owners whose companies go under point to lack of funding as the cause.

If you're out of money, it's usually because you're a bad manager. Of course there are exceptions, but in more than 80% of our clients we find they have not managed their resources correctly.

For instance, we did business with a lock and key company. They had $1 million worth of keys in their inventory but no system of keeping track of them. All the keys were different—they couldn't identify which ones were selling and which were not.

So the company's assets were all tied up in these keys, and a lot of them were the wrong keys. You can't finance your way out of problems like that, you have to manage your way out of them.

Does bad management typically begin at business startup?

It may start right at the beginning, or it could be that business owners have some early success, then get carried away and get lazy or become distracted. Even though your business is doing wonderfully, you can't spend all your time playing golf. You still have to work 60 to 70 hours a week to be a successful entrepreneur. Companies just don't run themselves.

What are the specific hallmarks of failing to manage successfully?

Not doing financial statements honestly and accurately each month is the real killer. If you're in school, and you get a bad report card, you know you have got to change those Ds and Fs if you want to graduate. In business, you've got to look at the report card and make changes if you want to succeed. But you can't make those changes if you don't have financial statements, or the ones you have are not accurate.

So, don't include receivables that you're never going to collect, don't fantasize about sales that are never going to happen. Look at your profit and loss and cash flow statements in the cold, hard light of day.

Don't make excuses; don't deny bad news. Face the problems and figure out why you're losing money. Either your prices are too low or your product costs are too high. Deal with that right away. Don't implement a plan that will reduce your losses in six months, because you'll go out of business before then.

Is it human nature to want to deny or put off tough decisions?

Tough decisions usually involve confrontations, and most people don't like those. But my mother used to tell me to eat my vegetables first, and that's what I tell clients.

We all have things we don't want to do or we shy away from: Increase prices on our biggest clients, fire an employee who's not doing the job. It's easy to delay or procrastinate, but it's much better to make a checklist of those tough things, do them, and then move on.

Time is money, and procrastinating wastes your money. Every day you let that situation continue or keep that ineffective employee on the payroll, it's costing you money.

How do employee issues lead to failure?

Many small businesses—and even big businesses—fail to demand top performance from their employees.