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A brief about the reason for business failure

Entrepreneurship zeal and business acumen is required to do any business. By entrepreneurship zeal businessman reinvents itself all the time and on the basis of findings of continuous reinvention, businessman remodels his business process as and when required with his business acumen.

Performance appraisal of a business is not done in the way business is done. Performance appraisal of a business is done on a particular day for particular period of time. Though the appraisal is done on a particular day, business continues on all the days of the period of time. So the result of performance appraisal is an average of good and bad. From the average of good and bad, we need to retain good and eliminate bad. If this can be achieved, loss-making business entity can be turned around into profit- making business entity.

How a business performs or what is a business process?

Creation of business process is investment in fixed assets and operating the business process is revenue expenditure which results production of goods and services. Sell of goods and services bring cash to the organisation.

Operation of business process starts with outflow of cash for procurement of raw material followed by series of outflow of cash for procurement of other resources and ends with inflow of cash on sale of goods and services to customers. This is cyclical in nature and called as operating cycle. Duration of operating cycle is operating cycle time. Now if the difference between the ‘aggregate of series of outflow of cash’ and ‘inflow of cash from customer’ is lesser than the ‘time value’ of ‘aggregate of series of outflow of cash’, the business entity incurs loss.

This loss can be reduced and thereby nullified if the

  1. Duration of operating cycle is reduced so that the time value of ‘aggregate of series of outflow of cash’ is lesser than the difference between the ‘aggregate of series of outflow of cash’ and ‘inflow of cash from customer’.

  2. If the outflow of cash is reduced; and/or

  3. If the inflow of cash is increased.

After identifying the area, where we are losing money, the next course of action is plug the holes. There are numerous ways for this.

Banks make investments in business houses by giving them loan. But it is not monitored whether the business houses in turn are making investment or not.

Inflow of money into the business entity occurs only from customers except loan from financial institutions.

Besides repayment of loan, outflow of fund takes place from business entity in three ways: - by making expenses, by incurring cost and by making investment.

In case of expenses, outflow of fund takes place irrespective of whether any inflow takes place or not.

In case of cost, outflow of fund takes place and inflow of goods and services take place but one-to-one matching is not done as the same is not possible.

In case of investment, outflow of fund takes places against anticipated pre-determined inflow of cash or other things equivalent to cash.

One example will explain the matter

Salary itself is an expense.

Salary of Sales officer is cost of sales.

Salary of a Sales Officer posted at the premises of a high-volume customer is an investment on that high-volume customer.

A business entity cannot make any loss

  1. if it can model its outflow of fund in a manner that

  2. it does not make expenses;

  3. it does not incur any cost;

  4. it only makes investment; and

  5. the business entity continuously compares the pre-determined anticipated inflow with actual inflow; and

  6. Take corrective actions to ensure that the pre-determined anticipated inflow takes place.