Affordable Dream Homes

How well can someone know the reasons for failure of a business? In my case, intimately. I partnered with my husband Dave for five years as a general contractor in our business Affordable Dream Homes. We became a statistic, one of the fifty-five percent of businesses that fail before their fifth anniversary (Hatten, 2009, p. 17). In the years that have passed since our business failed, I've mulled over why and have wrestled with what we could have done differently. Businesses fail for many reasons. Our case was classic. We failed in the long run first and foremost due to poor management. We also lacked capital, expert advice, marketing know-how, and we were pricing our product incorrectly.

Off to a Great Start

We started the business with great prospects, however. My husband Dave and I had dreamed of opening our own business for over ten years. Both of us craved the independence afforded us of working for ourselves, but between the two of us, we didn't possess much in the way of small business management experience. I worked as an accounting and administrative clerk. Dave had a degree in construction management. He had managed a Winchell's donut shop for two and a half years fresh out of college and then worked in residential construction as a construction manager and finish carpenter for five years.

We became homebuilders in March of 1992. Our goal was to build beautiful, affordable new homes for clients and we named our company Affordable Dream Homes. We started the business with the tools Dave had acquired during his five years in construction, but we had no working capital. We ran the business out of our home using our one car garage to store our equipment and materials. Our first project fit our company vision like a dream. It was a nine month new home construction project for an architect friend of ours.

At the end of the project, Dave put together a brochure to solicit repair and remodel work. He delivered them to realtors' offices within a 10 mile radius of our home. The brochures were effective. Realtors referred their clients to us and we immediately won jobs in home repairs and remodel work. That was the extent of our advertising efforts. After the initial brochures, all our projects came through word-of-mouth advertising.

Trouble in Paradise

For the next four years it was always feast or famine, too much work to do, or none at all. We deviated unintentionally from our original vision of building new homes. Affordable Dream Homes main work turned into remodel and repair work with only one more new home construction project while we were in business. Times had always been lean for us. With Dave working in the field and me running the home office, our combined profit from our business ran between $20,000 and $30,000 a year for the five years we were in business.

The Beginning of the End

During our fourth year in business, with our finances so tight, we decided to seek the advice of a Service Corps of Retired Executives (SCORE) volunteer. We began writing a business plan for the first time. But it was too late. One of our clients for a major remodeling project defaulted $30,000 when they could not obtain refinancing at the end of the job. The default caused us to close our doors in 1997 and forced us to declare bankruptcy.

Affordable Dream Homes was doomed from the beginning. According to Graham in the article, Jump-start your business: A tough-times approach, "some firms ... opened their doors lacking the key ingredients for success -- sufficient capital, business expertise and market understanding. They were destined for failure as soon as the first minor glitch appeared on the economic screen." (Graham, J. R., 1994, p. 22). Affordable Dream Homes was missing the exact ingredients Graham talked about: capital, management experience, a clear understanding of our market, and a detailed marketing strategy.

Poor Management and Lack of Professional Advice

The top two reasons for business failure are poor management and under capitalization. Poor management can take on many forms from not keeping proper accounting records, to not managing employees well, to not having a business or strategic plan in place. (McHugh, McHugh, Nichols, 2010, p. 158-159). With Affordable Dream Homes, we had very little management experience between the two of us and did not understand the basic necessity of having a business plan.

Poor management of small businesses frequently stems from not seeking outside counsel due to lack of finances or not wanting outside interference. Small business owners are frequently "crippled by a lack of objective opinions about ideas and a lack of expertise in key areas such as finance, inventory management, and operational management." (Warfield & Glover, 2011, p. 81). We did not seek outside advice until just a few months before we filed bankruptcy. By then it was too late to rescue the business. We sought the free advice of a SCORE volunteer but were hampered from hiring an accountant because we lacked capital.

Under Capitalization

Under capitalization comes into play when a company does not have sufficient operating funds in place. Frequently a business will not have adequate funds to begin with. (Hatten, 2009, p. 190). Affordable Dream Homes was undercapitalized. We started the business on a shoe string and continued to operate it on one without any financial reserves to fall back on. Instead of investing back into our business, we lived off the profits.

Pricing Problems

Another reason for business failure is businesses overpricing or underpricing their products or services. Entrepreneurs frequently fail because they have bad pricing models. ("How to diagnose what's wrong with your business", 2012, p. 42). Just as we were closing Affordable Dream Homes, we discovered that we had been charging only half the going rate for labor in our area. If we had conducted competitor