George Cloutier talks about how entrepreneurs can avoid startup pitfalls and set their companies up to profit right from the start
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. If someone bills themselves in an interview as the best salesman since sliced bread, hold them to it! They should be as good as they say they are.
The same goes for your suppliers, manufacturers, distributors, and anyone else you work with. You're paying them to deliver excellent performance, and if they don't, you have to find someone else who will.
Again, it's tough because people don't want to have confrontations. But if you want to be a business owner, you're going to have to confront people, and if you can't handle that, you're going to fail.
The other thing about managing employees is that most business owners don't have pay-for-performance policies. If a potential employee asks for $35,000 a year, give them $30,000 with the option to earn $40,000 if they do well.
It will be worth your money to pay 25% more if you get the performance level you want out of that employee. If other employees complain, you tell them they can earn just as much if they perform just as well.
What additional management errors do you commonly run into?
There's way too much emphasis right now on business owners needing to delegate. When you're a small-business owner you do have to delegate, but you can't abdicate. Ultimately, you're responsible for the company and you have to stay on top of things.
Even after you've delegated something crucial to an employee, you have to circle back regularly and make sure you're getting the right performance in that area. Don't blame others for their shortcomings if you didn't bother to follow them closely enough.
I tell clients there are no bad employees, just bad owners. If an employee isn't working out, you have to get rid of him. If you're too busy to notice something's going wrong, you're not managing your time correctly or working hard enough.
If your business is in danger of failing, should you bring in a consultant?
If you bring a consultant in, make sure you're paying them to get a new system implemented. Don't just pay for advice—you can get loads of that for free.
Consolidating the advice and implementing it is the hard part. Get someone in who can really help you get your hands on the problems and change them. We spend 80% of our time at clients' companies working with management and employees, doing training, and hiring and firing.