How do we discuss the failed company when ‘failure’ defies precise definition? For example, your firm can be a managerial failure, financial failure or legal failure, but these are not interchangeable terms. Your company may become a managerial failure well before it becomes a financial failure, and it may linger as a financial failure without becoming a legal failure. Managerial failures never reach their potential. The great myth is that managers are successful if they turn a profit.

How much profit is seemingly unimportant. Conversely, unprofitable managers who sidestep far greater losses due to their skilled management are condemned. Who is the true managerial failure – the manager who earns a $1 million profit for a company that could easily have earned $5 million, or the manager who limits losses to $1 million for a company ordained to lose $5 million? The lesson: It is not enough for your business merely to be profitable. You must make it the profit maker it can be. Anything less is managerial failure. Many companies, whether large or small, are managerial failures long before they turn into financial failures. They lose money, or earn so little, that their stockholders would fare no worse stuffing their investment under their mattress. This reality prompted Will Rogers to quip, “I’m more concerned about the return of my investment than I am the return on my investment.” Stockholders of many companies and who want productive use of their money, have an objective their managers never achieve. Will Rogers had another quip for this: “Executives who do not produce successful results hold on to their jobs only about five years.

Those who produce results hang on about half a decade.” Study the earning records of today’s businesses and you can easily spot the managerial failures that will become tomorrow’s financial failures. Will your business be among them? For every firm that drowns in a sea of red ink, hundreds more are merely doused. Each year, nearly half of the nation’s businesses lose money. These firms strive to be average. Two-thirds of the profitable firms earn less than what a secure savings account earns. Only one corporation in seven performs better. The press exposes the larger corporations that are the managerial failures, while most family businesses shuffle along, handing something less than a fair week’s pay to their owners. Of course, it is impossible to accurately measure the profitability of the smaller business, which represents two-thirds of the twenty-five million American companies, because their owners can so easily hide profits. Only they know whether they are truly making or losing money. Managerial failure advances to financial failure when the business has chronic and serious losses or becomes insolvent with more liabilities than assets. Troubled companies usually suffer from both unprofitability and insolvency. Continuing losses, of course, weaken any organization. Financial failure, as an indicator of a company’s economic condition, may overlap with managerial and legal failure.

Financial failure bridges the subperforming company (managerial failure) and the company formally declared alegal failure (bankruptcy). There is legal failure when a company’s liabilities exceed its assets, yet a company can operate for years with more debts than assets because of creditor leniency and patience. Many ‘upside-down’ companies eventually turn the corner, produce a profit and brighten their balance sheets, much to the relief of their patient creditors. Few debt-ridden firms survive without creditor patience and rapidly improved profits.

A company is also defined as a legal failure if it cannotmpunctually pay its debts. Of course, if you follow this archaic test, most American companies are bankrupt. This rigid standard is undoubtedly a throwback to an era when businesspeople  actually paid their bills when due. The fact that a business closes its doors does not necessarily indicate that it is a legal failure. Illness, retirement and other personal reasons force many closings. Even the unprofitable business that closes is not a legal failure if it fully pays its debts. Many companies that are financial failures endlessly linger without becoming legal failures. Others file bankruptcy – an admission of legal failure – but emerge from bankruptcy with a new balance sheet and new lease on life. They are no longer legal failures; however, they will stay financial failures until they become profitable. Failure, then, is relative, a term that exists in the abstract. The performance of your company can be measured against other businesses, comparable companies within your industry, its own potential, or its prior performance. How you measure success or failure depends largely on who wields the ruler.