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The common reasons for business failure

Tuesday, May 11th, 2010

The common reasons for business failure

If you are reading this you may already have assumed you are facing business failure or you are hoping to avoid making the steps that could lead that way. I read an article recently that cautioned against risking love, health and happiness chasing a dream that was broken. Better it said to accept that one business has failed and to close down and start again, having learned the lessons.

It is a fact that many small business that set up are closed down again within three years. The harsh reality is that all businesses fail but a disproportionate of small businesses struggle because they simply do not have the resources which larger companies have to get them through the hard times.

Of course business failure does not always occur because of something that you have done in your business. In a trading environment, there are buyers and sellers, and your business will be as much affected by what happens to them as what you yourself do.

So what is business failure? Commonly it is a position reached by a business, where it can no longer continue to trade without incurring further liability. The business will probably be insolvent, in that it cannot pay its debts as and when they fall due, or its assets are less than its liabilities. The important matter which was alluded to above is that you have a grasp of the state of your enterprise early, as to realise too late that you are facing failure can lead to greater legal problems later on.

Businesses fail for a variety of reasons. Amongst the reasons that we come across are the following:-

Sales: Are you selling what people want to buy. With the best will in the world and the highest motivated staff, if you have a product nobody wants them you will not sell it. If you are not selling you are not generating revenue and so not covering your costs.

Competition: Is your market place too congested. Are there people out there doing what you do, but better, cheaper, in a ore efficient way, with a better message.

Skill Set: You may be a great engineer, but that doesn’t mean you have the skill set demanded for all operations in a business. This is a common problem for the small SME. It is important to surround yourself with people who can do the things that you can’t such as selling, or credit control or accounts.

Financial Control; Do you know your sales, do you know your cost of sales, do you know your breakeven point. These are fundamentals for any business and you need to be all over these to have a chance of surviving. It is easy for costs in a business to escalate. Have a look at any successful business and you will see costs driven to the floor. Ryanair is a prime example of this.

Cost of finance: Are you borrowing at the right rate. Do you know what it costs you to run an overdraft or pay your loans, or factor your invoices. All financial elements of the business have a separate cost. Are yours being done at the best rate available.

Lack of resource: Do you actually have enough cash or credit to be able to complete the jobs you are taking on. At present this is a key issue for many businesses. They have work they can quote for and are getting that work in at a profit, but they do not have the resources in cash available to get supplies to start the job.

Overtrading: The flipside of the above is that you actually take on too much too fast and simply run out of money to finish, as supplies and extra staff have drained what resource you did have. Always grow at a steady and affordable and planned rate.

Customer or supplier insolvency: Bad debt can cripple a small business. I have seen lots of little business forced to close because they have suffered a bad debt by a big customer. Never be too reliant on one customer or supplier no matter how tempting it may seem or prestigious they are. If something goes wrong with them, they will take you as well.

There are so many things that can go wrong aren’t there. Yet it can be the best thing that you ever do if you get the planning and execution right at the outset.

If you need help because you have some problems please call.

Tags: Business, common, Failure, Reasons
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