Three Small Business Mistakes Caused By Being Too Close
During the economic collapse of 2008 small businesses across the country shuttered their doors. Many of them blamed the floundering economy, and rightfully so. At a certain point, slumping sales will undermine even the most efficient break-evens. However, the recession affected some companies differently – pushing them over the edge by merely highlighting existing weaknesses. Today we offer a case study of a company that fell by straying from basic principles: Eurway Furniture was family-owned modern furniture retailer topping out with $27 million in 2007. Today Eurway is gone. The debt and management decisions underlying the company’s expansion and demise are classic examples of three of the most common mistakes that are driving small businesses into the ground.
Mistake #1: Failure to recognize and focus on what works. Too often small business owners begin with a business plan that they are simply unwilling or unable to pry themselves from. Eurway is a classic example of this error. In 1996 the company had two showrooms, one each in Dallas and Austin, Texas. The owners voted to fund two new expansions by 2000: a state-of-the-art e-commerce web site and another new showroom in Houston. Both expansions were successful, and by 2006 the company was stockpiling profits from all four divisions. At this point an unbiased assessment of the company would dictate focusing any limited investment towards the division of the company with the highest profit margin. In the case of Eurway, each showroom was profitable; however the web site surpassed them all with respect to margin and potential. Nevertheless, ownership decided to instead take on an enormous debt load and focus on opening more showrooms…
The takeaway here is that small business owners need to accept the unforeseen and adjust accordingly. Although you opened your own construction company because you love building new homes, don’t be blind to the fact that most of your profits are instead coming from small renovation projects. Small business owners have the unique advantage of being passionate about what they do. Coupled with that passion are blind spots. Don’t let valuable revenue and potential pass you by because it wasn’t part of the original business plan.
Mistake #2: Failure to assess the future without bias. It’s natural for small business owners and entrepreneurs to have faith in their ideas. In fact, it’s required. This country was founded on people that were willing to take risks and do the undone. However, do NOT simply ignore evidence regarding your company, your products or future. Back to the case study: In the late 90’s Eurway opened two showrooms: the Austin showroom opened in 1995 and Houston opened in 2000. Each location took approximately three years to begin generating profits. When the company decided to expand again in 2006 these previous experiences were discounted entirely. In fact, it was widely believed by the ownership that the new Tempe, Arizona location would perform better than the web site within one year! This unfounded belief led the company’s officers to take on unprecedented debt to fund the new location, including a costly increase in inventory that became the first domino in the downfall of the organization.
Simply put: do NOT confuse what you wish would happen with what will likely happen. If your small business is showing a trend of declining profits, it would be foolhardy to assume that trend will simply stop. Take corrective action to increase profits or reduce expenses. Dream big, as they say, but plan for reality.
Mistake #3: Failure to commit to corrective actions. As inventory flowed into their new Tempe warehouse, Eurway’s credit line disappeared. By the beginning of 2008 Eurway had millions of dollars of stagnant inventory and no cash, with new debt coming due each month. The Tempe sales failed to outpace the e-commerce division. Ironically, sales actually tracked quite closely with their Houston store when it opened in 1998. As a family-owned business with millions of dollars in debt, bankruptcy was the only option. Nevertheless, Eurway staggered along until early 2009 before finally beginning the bankruptcy filing. This inability to take decisive, company-saving action would become the closing theme of the organization through its liquidation in June 2010. From filing bankruptcy, to layoffs, to closing only two of the three floundering showrooms, the company consistently shied away from taking all of the actions required to stop the bleeding. Each half step tipped the next domino in their demise.
By 2008 Eurway was out on a limb they could never climb down from on their own. A targeted bankruptcy focusing on relieving them from the obligations of the two new showrooms and related debt virtually guaranteed survival of the company. Unfortunately, at each step they hedged, hoping for a miracle.
When your small business encounters trouble never underestimate how deep your hole is. If you need to layoff three employees, don’t just layoff two. If you need to cut expenses by 8%, don’t stop at 7.9%. Commit to taking the actions needed to save the company you dreamed of.
Small businesses are the work products of individuals that dreamed. Like every business there are risks and rewards; however these three mistakes are the result of being too close. So, if you can’t see the forest for the trees, consider employing an unbiased consultant to help clear your vision. It may be the best thing for your small business.
