Reasons For Business Failure: Why Do Businesses Fail?
Half of the UK's small businesses fail within the first three years because of cash flow problems. They either run out of money or run out time. Consumer debt may be rising and personal bankruptcies increasing as a direct result, but company insolvencies are also on the increase.
So why do businesses fail?
The main reason is money: lack of it, or lack of it when it's most needed (for example, work may have been completed and invoiced for, but that invoice may not be paid for up to 60 days, and creditors may want their own payments from you immediately. There are many solutions to help businesses improve their cash flow, from factoring and invoice discounting to more effective budgeting, but many businesses leave it too late. And it is small businesses who suffer most, as they are less easy to rescue than larger companies.
Poor management, poor accounting systems, poor market research - they all share the blame for business failure. And losing control of a market due to competitor strength is another key reason. Manufacturing, retail and transport and communication businesses can be affected my natural disasters in countries where materials and products are sourced from or a weak pound on the stock exchange.
Other key reasons for business failure include:
- Lack of market research when entering new markets, resulting in poor sales and return on investment.
- Overspending. Or spending too much on frivolous luxuries instead of products and services that improve the bottom line.
- Poor cash flow control: paying creditors to early, buying too much stock or giving customers payment terms that are too long, late payments and bad debts. These can all lead to a lack of working capital and cash flow problems.
Find out how to improve your cash flow here.
- Failure to listen to customers. For example, you may manufacture a product, set it at a certain price and get a stand at a targeted exhibition. Your customers may tell you that they love the product but find it a bit too expensive. The children of your customers might be thrilled by your product. If this were the case you'd be foolish to ignore your customers. Far better to bring down the price and create a children's version of your product at an even lower price point. Listen to your customers and adapt accordingly.
- Failure to pay taxes or 'crown taxes' including PAYE and VAT. The fines for not paying these taxes can wipe out a small business fairly swiftly.
- Growing too quickly or too slowly. You can end up overtrading or undertrading - getting in too much stock or too little stock. It is best to be busting at the seems before you grow, and most business leaders suggest organic growth as the safest option in business growth.
- Lack of innovation. Some businesses never change, but they lose their market share when a new company comes along with a new way of doing things. Take Courts and other traditional furniture stores. They stayed the same, it was comfortable, and they didn't see IKEA coming. And bang goes their market share as millions of their loyal customers traipse off to fill their trollies with modern and affordable stuff.
- Loss of financial support/investment. If an investor pulls out, you may find it hard to attract another one in time.
- Lack of sales/profit and/or a rise in costs, especially if unprepared for a dip in sales or an increase in expenditure.
There are many more reasons, from rising stock levels and static sales to contract disputes and under pricing.
And the best way to avoid them all is to plan ahead. However, if you do find yourself facing business failure, you have two main choices, and the earlier you deal with problems the more likely you will be of avoiding insolvency.
You can either opt for company survival or for company closure. Two procedures are available for those seeking to rescue the company and two for those ending the company.
Business failure
Business failure: Business failure: Business failure
Business failure: How to reduce business risk
Business failure: Reasons for business failure
Business failure: Rescue company
Business failure: End company
Business failure: What are a directors responsibilities
Business failure: What happens to your employees?
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