Ten Major Reasons Why Businesses Fail

This is the single most common cause of new business failure. Many businesses, even profitable ones, fail because they run out of cash, they go insolvent. Insolvency occurs when a firm is unable to meet its obligations such as salaries, creditors, interest payments and expenses. Cash flowing out of the business faster than it comes in causes it. Although a firm can sometimes survive a period of insolvency by delaying the payment of its obligations, it is liable to be sued by its creditors or employees (or have its electricity or telephone cut off) at any time.

Cash flow crises are caused by two factors - poor cash flow Management and under capitalization (insufficient start-up funds). The intelligent use of accurate cash flow forecasts is the most reliable way of remedying poor cash flow management. An accurate cash flow forecast will also show whether the funds secured to start-up the business are adequate.

Spiraling expenses can adversely affect both cash flow and profitability. Failing to plan for inflation and poor control of unnecessary expenditure are the two major causes of this problem. Keeping accurate financial records is a prerequisite for controlling expenditure.

A poor gross profit (profit before expenses and tax) can be caused by only two things - low volumes and low margins. A low sales volume may be due to poor marketing, an unattractive product or too high a selling price. A poor margin is the consequence of to low a selling price or unnecessarily high production costs. If a firm’s product, marketing strategy and production process are satisfactory, the problem is usually one of price. There is often a delicate trade-off between selling at a high price in order to improve the margin and selling at a low price in order to improve volume. In some situations, it may be wise to consult a marketing expert.

A common problem is that the owner loses interest in the day-to-day running of the business once the excitement of the initial start-up has subsided. Starting a business, which involves work that you enjoy doing, can prevent this. If you begin to lose interest, despite having taken this precaution, the damage can be limited by training a motivated and competent person to take over.

In the early stages of a small business the owner tends to do everything. This is fine as long as the business is fairly small. But as the firm grows, the task of managing the business becomes increasingly complex and time-consuming, and a point is eventually reached beyond which it becomes impossible for a single person to manage the firm effectively.

The owner may do one of two things - delegate certain management tasks to others and concentrate mainly on strategic issues, or desperately try to stay in control, and refuse to relinquish any decision-making power at all. If the latter course is chosen, the business is in grave danger of failing. The way to avoid this problem is to be alert to it and to start grooming key subordinates for management roles at an early stage.

Sometimes the owner becomes so engrossed in tiny details or an irrelevant issue, that important issues are ignored or glossed-over. For example, the owner may spend days reading through computer magazines simply to choose a personal computer. The problem often occurs when the business is experiencing some kind of difficulty and the owner finds it uncomfortable to think about the difficult problems and resorts to solving a few easy ones. It is away of escaping from troubling concerns while at the same time feeling that useful work is being done.

To avoid this, it is essential to keep the business in perspective. Take the time to ask big questions like 'Is our strategy working?’’ What are our objectives and are we going to achieve them?' If you find yourself spending hours beautifying the office or perfecting a filing system, ask yourself: 'Is this the most useful thing I could be doing right now?

Starting and running a business is a complex undertaking. There are hundreds of things, which need to be done at specific times. Poor or insufficient planning results in unwelcome surprises, broken promises, under- or over-production, cash flow crises, missed opportunities, and a myriad of other problems. Keep a diary and draw up a detailed business plan to consult and revise regularly. This will relieve the burden of having to remember what needs to be done when, and why.

The sales forecast is central to almost every decision and plan in the business. How much you expect to sell determines how much raw material or stock is ordered, how much is invested in the business, what type of machinery is bought, who is employed, how much is spent on advertising, and so on. Unfortunately, it is often extremely difficult to forecast the demand for a new product or service with any accuracy. If this is the case, it is probably better to be somewhat conservative - underestimating the demand will not put anyone out of business, but overestimating may.

This is where market research can play a very important role. The better the understanding of the market, the better the estimate of future demand for the product or service will be. If the level of uncertainty is high, do a sensitivity analysis. Ask - What if? for a number of sales scenarios, gear up for the one that is most probable, and make contingency plans for the rest.

Financial records are not kept for the sole pleasure of the taxman. They are valuable tools for measuring the success of a business, detecting problems and maintaining control. Financial records area source for analysis of what went wrong, and right, with the business in the past and to relate this to decisions taken at that time.

Other forms of record keeping are also important, for example, minutes of meetings, a diary, written plans, and correspondence. A simple filing system is an invaluable aid in this respect.

Sometimes a business expands despite a lack of management skills in the firm. Intuition, an expanding market and luck, allow the firm to prosper despite occasional mistakes. Sooner or later, however, the company will face a situation, which calls for real management expertise. Unless external help is obtained, the owner may be unable to cope with the situation, and the business may fail.

The obvious solution is to develop individual management skills. For example, read management texts, subscribe to a management journal, attend courses or receive counseling from management experts. Another approach is to help employees to develop management skills by sending them on courses or encouraging them to read about management issues. Remember the basics of management, P.L.O.C. (Plan, Lead, Organize and Control).