Ten major reasons why new businesses fail
Cash flow problems
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. It is caused by cash flowing out of the business faster than it comes in. 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 undercapitalization (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.
Expenses get out of hand
Spiralling 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.
Problems in selling the product
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 too 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.
The owner’s enthusiasm wanes
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. This can be prevented by starting a business which involves work that you enjoy doing. 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.
The owner fails to delegate
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 thisproblem is to be alert to it and to start grooming key subordinates for management roles at an early stage.
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Posted by: arlene
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