What are the warning signs of a business that is destined to fail?
Is your business heading towards failure? Is a company you are thinking of joining or investing in on its way out? Here’s how to know the signs…
Businesses have challenges. In fact, as a startup, there will be challenges every single day. They often aren’t small ones either. Some just come with being in business and will be worked through with good advice and decision making. Even big layoffs and pivots can be a part of healthy business corrections. Then there are these red flags that may indicate the company is headed in the wrong direction. Know them, and avoid them.
Cash Flow Problems
If you are spending more than you are making, that’s a basic math problem. It isn’t sustainable. If income stalls as with those COVID lockdowns, and there are no cash reserves, that can quickly become a big problem. Unless those cash flow dynamics are changed quickly they can send even the biggest and longest-running corporations into bankruptcy pretty quickly. Nevermind the impact on a young and lean startup.
You can survive not making payroll on time once or twice. You can survive running down to the last month of runway before you get a new round of funding in the bank. Most great startups have been there, at least once. Don’t make these things a habit, and try to stay ahead of the game as much as possible, but don’t quit until the first sign of a struggle.
Too Much Overhead
Too much overhead can be a big red flag and one of the critical warning signs of a business that is destined to fail. It often signals cash flow problems could come at any time. Any revenues and profits can be quickly eaten up by these debts. Businesses should be running leaner than ever. Those still holding onto antiques and luxuries of the industrial era are going to struggle to stay competitive.
You can often tell where a company is headed by their job ads. If they are hiring super cheap or are offering unrealistic pay, then you can guess what their product and operations are going to look like on the inside and how customer service is going to end up.
When you are fundraising the team is everything. In this regard, keep in mind that in fundraising storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
If a founder looks confused or can’t answer how they are different from their competition and what their unique proposition is and what that means as a competitive advantage, they probably aren’t going very far. They have nothing to differentiate them or be memorable for. That’s going to make customer acquisition difficult and doesn’t give any defense from rising competition.
No Solid Marketing Plan
90% of success can rely on marketing so keep this one as one of the warning signs of a business that is destined to fail. Without a real marketing plan, any budget a company does have can be quickly burned through. Most rely on consistently flipping that with new sales to continue marketing and fueling the business with cash. A marketing plan can’t be just a handful of campaigns thrown at the wall based on copying what others are doing. It needs real research, data, tailored tactics, and comprehensive strategic funnels.
You may be interested in the video below where I cover in detail how to create a marketing plan.
High Customer Churn Rates
High customer churn rates are a sign of deeper underlying problems. The customer lifetime value will be low. Maybe there isn’t a real product-market fit. Maybe the service is terrible. Or the pitch over-promised and the reality under-delivered. In most cases, it may be better to have fewer customers being onboarded, but ones which will stay, leave good reviews, and help grow the business by word of mouth.
High Employee Churn Rates
There are businesses that have traditionally run on high churn rates. They’ve survived like that for years. It is part of their business model. Whether that continues to work will be seen. It certainly makes costs high and suggests there are underlying issues.
In most cases, low employee churn rates are a good sign. They are happy and believe in the company and are building stronger relationships with customers and business partners. Costs are lower and the team is more cohesive.
High churn rates can also be a precursor to negative online reviews and ratings on platforms like Glassdoor and a key insight warning signs of a business that is destined to fail. Even more of a concern is when the reviews of the CEO and confidence in the CEO is low.
Short Term Focused Decisions
Yes, in startups there needs to be a focus on the next immediate steps. Yet, when the short term is prioritized over long term health and sustainability, there may be no long term. Contrary to the perception and tradition, this isn’t good for anyone, including customers, staff, the industry, or shareholders.
This often shows up as companies charging more while giving less than they were. As well as sacrificing their most loyal customers and power users. This is commonly seen after an IPO but can creep in at any phase of a business.
This also shows up as fraud or fudging numbers to make quotas. It means there is a weakness that is being covered up.
Time Is Being Wasted
The most valuable asset a company has is time. It is the most valuable asset the founders and team leaders have. If they aren’t spending their time focused on the highest value tasks, everything else can suffer. For example, they shouldn’t be trying to become masters of Google Ads or SEO. They should be handling the bigger things and hiring experts for those tasks.
Companies also can’t afford to be slow in decision making or neglect jumping on new innovations and boldly trying new things.
Unwilling To Take Advice
No one knows it all or has done it all before. Every company will face challenges, problems, and even crises. Those that are going to make it seek advice and act on it. Founders who are not coachable are a red flag.
Hopefully, this post provided some perspective as you are looking into the warning signs of a business that is destined to fail.
You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.