20 reasons for business failure



(1) The wrong idea
The majority of those who fail in business do not lack business acumen as such, in fact many of them have good entrepreneurial instincts. But of the many people with these qualities, only a handful get their act together on the all important marketing aspects of a business. It is the failure to get the business idea right first time that must be the prime cause of business failure. Some businesses do not fail as such: rather they simply fail to succeed. Most entrepreneurs only have sufficient capital for one chance in business. If they get it wrong, they are immediately hit with a knock out blow.

Thousands of small businesses are set up each year that do not have the remotest chance of success from the outset. Every town will have a hat hire shop that sets up now and then only to close down within a few months or even weeks. Totally hopeless and unresearched business start-ups like this perhaps account for 15% to 20% of personal bankruptcies.

(2) The unlucky
The winner of a major award for a new business start-up idea went bankrupt after a totally unexpected strike cut him off from raw supplies. Around 10% of business failures seem to have a major element of sheer bad luck involved.

(3) Undercapitalisation
In many surveys on business failure undercapitalisation often comes top of the list. It comes high on my list too, but undercapitalisation can take many forms. It can simply mean that too many businesses have too few cash reserves to survive difficult periods of trading. However, it also takes the form where many businesses have much too high borrowings. Large successful public companies understand that the ratio of debt to capital has to be kept strictly under control. They usually like to the capital value of their companies to be worth at least twice any borrowings. However, many smaller businesses often have borrowings up to the full value of their businesses or even higher. This problem arises a great deal in capital intensive businesses such as nursing homes and petrol stations. Such businesses are often servicing huge borrowings and the interest payments often overwhelm them. Such businesses even operating at full capacity can barely service their borrowings.

(4) The taxman cometh
Huge numbers of businesses are knocked out of action each year because of accumulated tax paperwork problems that result in a large tax debt becoming due. This is a general problem for all in business.

(5) Cashflow problems
Cash is king of the business universe. Run out of cash, and any business is doomed. Some businesses that are making profits according to the books, simply run out of cash because they have extended too much credit to customers and are not collecting these debts in fast enough to service their own creditors.

(6) The understanding and management of business finance
This means planning ahead for cash flow requirements and arranging in advance of needs for the appropriate borrowing or credit arrangements to be made. Expanding a business too rapidly requires an increase of borrowing needs before extra profits are brought back into a firm. Rapid, unplanned expansion has brought the downfall of many businesses.

(7) Non-payment from customers
Many businesses fail because their customers fail to pay them altogether. Each year tens of thousands of businesses go into bankruptcy or liquidation and the risks of not getting paid at all from certain customers are very real indeed. It is foolish to extend a lot of credit to unknown or new customers without assessing the risks involved.

(8) Dishonest and/or bad professional advice
Poor or dishonest advice covers a wide range of sins. Complaints range from false accounting reports to deliberate attempts at fraud by professional advisers.

(9) Selling
No business can succeed unless it markets itself successfully. Careful thought should be given to business names, logo and advertising. There is no magic formula for success in selling, but neither are there any special obstacles. Anything that can keep a business in the public eye will bring its rewards in due course.

(10) Buying
The same careful attention should be paid to buying decisions. Too many firms are carrying their profit in the form of unused stock either over ordered or to the wrong requirements. Stock ties up cash and should be kept to a minimum, and a range of prices should be sought from suppliers before ordering.

(11) Budgeting and planning
Every business must have a plan. If there is no plan then there is no gauge of success. Long and short-term plans should be laid. They should be looked at daily and amended when necessary. Financial requirements should be assessed and budgets made to keep spending in line with planned requirements.

(12) Leases
Leases of all sorts, on property and equipment, are often in themselves quite simply legal bankrupting devices.

People sign 20-year property leases thinking this gives them security of tenure. They fail to realise they have also guaranteed to pay the landlord his rent for 20 years. The basic rule of thumb should be never to sign a lease of any sort - period. If there is no alternative but to sign a lease its terms should be studied line by line and the long-term consequences carefully thought out.

(13) Wrong personality traits
Most successful entrepreneurs share certain personality characteristics. One is enthusiasm for the business they run. The other characteristic is combining this enthusiasm with cool-headed pragmatism when making business decisions.

Recent research has shown that successful public companies are not run by charismatic types as once was widely believed (we have seen all the characters like Robert Maxwell fall from grace over the last decade). Most successful companies these days are managed by conservative, pragmatic characters.

(14) Tougher market conditions
The harsh economic realities of the 1990s have changed the way consumers behave. Falling incomes and fear of unemployment have made consumers much more thrifty and discerning than ever. People are increasingly looking for better value for money and are also less tolerant of poor service. This trend is almost certain to continue into the future and competition is likely to increase as businesses become more aggressive in their hunt to gain market share.

(15) Loss of financial backing
The solution here is to improve financial planning. Banks and creditors have their reasons if they decide to withdraw support. A business should always have financial plans available. These should be shown to, and discussed with, financial backers who should also be told if the plans change or do not run to schedule. If financial backers are informed of what is happening in a firm on a regular basis it is unlikely that there will be the sudden withdrawal of support.

(16) Stages of growth
It now seems to be an accepted taught truth that most businesses go through various defined stages as they grow, and each stage has its own set of problems. In the first three years, new businesses tend to be run as a one-man-band and be undercapitalised and lacking in financial reserves. Management inexperience shows up here as the proprietor tries to cope with everything on his own as he attempts to build up the business.

(17) Chaotic expansion
Between three and five years, firms face the problems connected with rising numbers of employees and increasing overhead costs. They may also become involved in over-trading. This time is often characterised by crisis management, with problems being dealt with as they arise, rather than being foreseen and avoided.

(18) Maturing dilemmas
After five years, the problems change again and are characterised by: financing expansion; maintaining competitiveness; controlling the business; and indecision on future courses of action.

(19) Destruction of a major asset
Too often there is a tendency to cut corners on insurance in order to save in the short-term. In the longer-term this can prove fatal. Insurance companies, too, are often keen to collect premiums, but often quick to point to the small print to avoid payouts in the many complex claims that arise in the business field.

(20) Poor management
Many businesses fail because of poor management and weak organisation policies and procedures. Sometimes, too, they collapse through being entirely reliant on one major customer or supplier. Such positions cannot always be avoided, of course. These risks are perfectly acceptable so long as the measures already outlined are followed. By paying proper attention to the basics of running a business the chances of that business succeeding can be greatly improved.