Hindsight is a wonderful thing…
When looking back on events leading to the failure of a business it is easy to be self-critical. The truth is business owners are human beings who make the best decisions they can at the time. These are usually based on historic and current information to meet a future need or opportunity. Therein lies the problem! Just like weather forecasting, you can have all the experience and data in the world, but you can still get it wrong, and sometimes spectacularly!
Here are some of the more common causes of business failure:
Insufficient or poor information
To make good decisions, you need access to relevant and up-to-date information.
Information can be financial and non-financial and from both inside and outside of a business. Examples include management accounts, market data, customer surveys, competition reviews, etc.
The key is to ensure that the information is up-to-date, as accurate as possible, suitable for the decision at hand and presented in a way that is meaningful to the decision maker.
All this will lead to the best possible decisions being made.
Lack of working capital
Insufficient funding to meet ambition is an extremely common problem. The greatest idea, supported by the most robust of plans, cannot be implemented without the necessary funding.
All too often we see businesses fail because they take on an opportunity that they are unable to fund to completion.
Late payment and bad debts
Many businesses operate with an insolvent balance sheet (i.e. their liabilities exceed their assets), so a significant delay in payment from a customer, or worse still non-payment, can have a catastrophic effect on cash-flow.
If a business is slow at collecting payment on invoices, or is exposed on a particularly large client, immediate action needs to be taken to mitigate that risk.
All of the above feed into good cash-flow management. Many businesses operate with an insolvent balance sheet. This is acceptable as long as, on a cash-flow basis, they can meet their financial obligations as they fall due.
If an entrepreneur does not take the time to understand and plan their business cash-flow, then this is cause for concern.
Industry changes and product innovation
Industry sectors come and go, either through innovation, or migration to other parts of the globe where they enjoy better trading conditions.
For example, once there was a video rental business on every high street, but now they are gone, replaced by video streaming services such as Netflix and Amazon Instant Video. The pace of change is fast, unstoppable and sometimes unpredictable.
Change is also driven by developments in law or government policy. Examples include the smoking ban and both the introduction and recent withdrawal of government incentives for renewable energy.
Business owners must create the time to consider the world around them and be prepared to change course when required. This has never been more important than it is today with the ongoing Covid-19 crisis.
Misreading the economic cycle
Timing is everything, and creating a business not suited to the current and short-term economic climate leaves it exposed to failure.
The construction sector was hit hard by the onset of the recession in 2008. Notwithstanding the lack of supply of homes in the UK, the sector relied heavily on bank funding for development, whilst consumers relied on the banks to provide the necessary mortgages to buy. When the banking sector became unable to support both, the whole industry suffered a significant decline.
Loss of key staff/Ill health
Businesses rely on great people. When they are lost, the impact can be significant, especially in smaller businesses who employ fewer people.
Even if you have a bigger organisation, it’s sensible to have a succession plan so that, if your star performer is tempted away to pastures new, you’ve got someone ready to step up who knows what’s going on.
It’s essential that projects are documented so that you don’t suddenly discover that the staff member who has just departed hasn’t got the current project details in his head – with no records for the successor to refer to.
Other common contributors to failure include:
• Increased local competition
• Poor customer service
• Lack of clear vision/strategy
• Poor leadership
• Poor pricing
If you think your business is in danger …
When an entrepreneur leading a business identifies a problem, they should not delay in tackling it head on. Nor should they be afraid or embarrassed to seek early advice and support to do so. The sooner they seek advice, the more options will be available for them.
We would like to leave you with one last thought:
“A man must be big enough to admit his mistakes, smart enough to profit from them, and strong enough to correct them.” The above was quoted by John C Maxwell, an American author and speaker who focuses on leadership, and speaks annually to Fortune 500 companies, government leaders and diverse organisations.
This post was written by Bailey Ahmad Business Recovery