WHY DO BUSINESSES FAIL?

Likely causes of failure include:

• Owner may have gone into business for egotistical personal reasons rather than in pursuit of a clear opportunity.
• No formal business plan, with the business simply reacting to events as and when they occur. Proper planning should lead to effective resource allocation, the definition of clear and realistic targets and appropriate prioritisation.
• Expectations may be unrealistic
• The error may be a focus on short-term profits at the expense of creating sustainable value for the long term.
• Risking under-investment in marketing and promotion.
• Company may become over-generalised, trying to compete in too many markets rather than focusing on one or two as the category leader.
• It may be that company simply cannot grasp what is needed to aspire to sustainable competitive advantage in the longer term.
• Failure to understand and react to change: customer behaviour, competitors’ innovations and unforeseen initiatives, macro-environment.
• Failure to manage cash flow:

1. Spend cash before it is flowing positively
2. Having a capital structure carrying too much debt
3. Inadequate cash reserves
4. Poor credit arrangements
5. Managing debtors ineffectively
6. Managers lack of financial awareness and responsibility
7. Irresponsible personal use of business funds

• Poor inventory management, with working capital tied up unnecessarily in fixed assets.
• Poor forecasting may lead to unsatisfied demand.
• Controllable costs may be allowed to increase without challenge.
• Unnecessary over-investment in fixed costs
• Failure to prepare contingency plans to address volatility in company’s uncontrollable costs.
• Poor performance monitoring and defective budgetary control systems.
• Maybe the owner is just a jerk whom staff, suppliers and customers will not wish to support wholeheartedly.
• Poor management at the top of the organisation will bring down the company. “Entrepreneurs who treat the company as their own personal piggy-bank without paying proper heed to sound financial governance are often behind their business’ demise” (Wickham and Wilcock 2013). For instance,

1. Owner-managers can fail to delegate, and try to go it alone without seeking professional external advice- or worse, they may seek uninformed help or financial support from friends and family.
2. Owner-managers may tolerate inadequate, inexperienced or downright poor management because it is cheap and compliant.
3. Owner-managers may be unable to attract and retain the right talent.
4. Owner-manager’s overconfident decisions and failure to recognise his strengths and weaknesses.
5. Business owner may experience ‘burn-out’ due to loads of tasks or be subjected to family pressures and other life distractions.

Chances of success will be improved if companies pay heed to the following:

1. Develop a business plan
2. Obtain accurate financial information about the business in a timely manner.
3. Profile the target customer.
4. Profile the competition.
5. Go into business for the right reasons.
6. Do not borrow family money and do not ask the family for uninformed advice.
7. Network with other business owners in similar industries.
8. Remember someone else will always have a lower price.
9. Realise that consumer tastes and preferences change.
10. Become better informed of the resources that are available.