Corporates die like rabbits.For 96% of corporates, the 10-year mark, marks the end of corporate life, matching the 10 years lifespan of rabbits. The methuselahs of the corporate world, the remaining 4%, excel in cash management as well as protecting their independence. Reasons to go out of business are acquisitions, mergers, bankruptcy, etc. According to research, based on Standard and Poor’s Compustat, the “mortality rate” is irrespective of the past performance or the actual field of operations. In other words: It does not matter if you sell banana or airplanes. You are dead anyway. The decline is often triggered by situations of rapid change, where the dynamics of an (involuntary) transformation process keep accelerating and eventually exceed the management’s capabilities to control and adapt. As a matter of fact, the lifespan in the S&P 500, is heavily decreasing. Whereas in 1955, a firm was good to expect 61 years in the S&P 500, by 2015 this has decreased to 17 years, only. The fight for survival has become more brutal also among the titans of the economy.
Profit is a theory. Cash is a fact.The abstract of all analyses on bankruptcy is: “the firm couldn’t pay its bills anymore”. This is a simple, yet, terminal statement, subject to a number of known root courses. Peter Drucker says the reason for businesses to fail is, that management didn’t ask “What is our business?” in a “clear and sharp form”. Eric Wagner, a seasoned serial entrepreneur claims, entrepreneurs fail, because they “retreat to a cave”, when developing new products, instead of thoroughly understanding their customers’ needs. On a systematic level, the disconnect between company evaluation and taxation, based on EBITDA, on the one, and the brutal truth of cash flows on the other side, is adding complexity to a situation, which is, for companies in a critical stage, highly fragile and sensitive to any turbulence. Hence, the real issue is not cash, but the idea, how to obtain (and keep) it. In general, this is called “strategy”. The relevance of strategy for going concern is outlined by a research from the Turnaround Management Society, which identified main drivers for corporate failure:
- 54.6% continuing with a strategy, which is not working for the company any longer.
- 51,6% losing touch with markets and reluctance to adapt to changing customer needs.
- 39.4% concluding incorrect strategic decisions.
Now, about giants and dwarfsWhereas the strategy is the identification and deployment of (the right) ideas over time, this is reflecting a severe difference between mature organisations and Start Up firms. A mature organisation has sufficient time at its hand, to adjust opinions, operations and market offerings to balance for changing markets and demands. Start Ups, in hindsight, are dealing with time constraints, resulting from scarce resources, causing lacks to deploy products and services, quickly, address markets etc.. Short runways again, are leaving insufficient time frames for new strategies, to proof effectiveness. As a footnote: Whereas successful Start-Ups master to manage cash constraints by excelling on agility and create momentum ahead of competition, time is diminishing quickly. If major organisations fall over the cliff and find themselves in turnaround and distress situations. The inability, to adjust culture, thinking and operations, and master agility, is one of the major challenges, turnaround professionals are facing, when on-boarded (which happens normally too late). Going through the various “Why your start up will fail” Blog-posts, available from numerous self-proclaimed experts, a number of myths are in the room, regarding the reasons for default of Start Up firms. Some arbitrary chosen examples of such advice include:
- Don’t let your desire to grow your business distract you from the core purpose.
- Be willing to make changes to your vision, based on needs of clients and markets.
- Welcome innovation, don’t be afraid to stand out.
- Take a break sometimes.
- Don’t overexert your company.
Though this is more in the tone of a DO-It-Yourself column, the advice holds some truth. The major point is, the general myth of Start Up life&let die – constraint cash supply, is not highlighted here.
Advice is cheap, evidence matters.Whereas many of the published advice, appear to be either more from common sense or considerations around stereotype Start Up personalities, statistic analysis provides some valid insights. FRACTL concluded a postmortem analysis over 200 Start-Ups that failed. Also, CB Insights researched the reasons for default in 2014. Though the researches have a similar set of questions, the two results are not congruent. Top scoring elements (both values at least 10% of answers or higher) on both sides are:
- Business model not viable.
- Ran out of cash.
- Got outcompeted.
- No market need.
Take away: 96% of corporations do not survive longer than 10 years. As outlined by research, the major reason, to go out of business is the lack of agility to adapt to new market conditions. Inadequate financial control is decreasing as a root cause for distress situations. Also, for Start-Ups lack of strategy is the fatal trap, whereas running out of cash is the aggregate for lack of strategy. Coming up: The Board of Directors in the SME – Toothless Tiger or Turbo for growth and company development.
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