For entrepreneurs, the ultimate sign of financial anguish is generally running out of cash. However, running out of cash is not a cause of business failure and rather a symptom of business breakdown. Let me explain:
Why a Business Truly Fails
- Gross or Net Margins Slip: Gross profit margin (GPM) is calculated by deducting cost of goods sold from total revenue and then dividing that number by total revenue. GPM is used to denote ability of a company to effectively manage its most critical costs. On the other hand, Net profit margin (NPM) refers to the percentage of revenue that is left after all operating expenses, taxes, interest, business bookkeeping, and preferred stock dividends (with the exception of common stock dividends) have been deducted from the total revenue of a company. Usually, the NPM of a company is far more significant than the amount of earned profit.
- Profitability Challenges and Struggles: In today’s cutthroat business environment, it is important for every business (even the brick-and-mortar ones) to make profits that are sufficient enough to survive. There is no doubt when we say a company that is not profitable is a business at huge risk. An unprofitable company will then resort to raise capital from outside that opens up a completely different world of control and risk.
It All Starts Internally: Watch for Your Employee Turnover
Employee turnover is classified as the percentage of the workforce of a company that quits voluntarily during one year.
High employee turnover rates do not always indicate that there is a problem with management or that the company is not a great place to work. Remember: employees of companies with great visibility and brand value are more “poached.”
Good managers and entrepreneurs can control employee turnover rate by managing compensation, working conditions, supervision, training, communications, monotony, and organization practices. Essentially, you’ve got to make your own workforce happy!