Why do businesses fail and what to do about it

April 22, 2015

No matter the industry, businesses fail due to a number of reasons. What are those reasons?

The other really interesting thing is that you can do something about it in most cases. What do I mean when I say that?

I will actually take it further and say that 87.6% of why businesses fail is within our (or the business owners) control. Wow that is huge.

Let’s have a look at what these things are –

32.1% fail due to poor financial management of financial activities

This includes lack of funding in the business to ensure you can meet your obligations. People in business do not keep a track on their debtors, creditors and stock control. Also, for financial services businesses the other added matter that most people do not keep a track of is their work in progress (WIP) or their time.

In regards to debtors it always takes longer to convert sales into cash than we initially think. So we must be organised. People think that all I have to do is increase my sales and everything will be ok. That is not necessarily the case as from what we have seen if debtors are not being collected quickly enough increasing sales just adds to the problem. The key is to have a process that you follow and you must be vigilant and follow debtors up.

In terms of stock and stock control it is really important not to hold more stock than is required as that means you have the risk of obsolesence, damage, theft and cash just sitting there.

In terms of WIP or time we ourselves are the biggest de-valuers of our time. We look at the work we have done and then start talking ourselves down. We have the biggest issue with price than our customers, clients and patients do. So the key is to have confidence in what we do as I am sure we all provide awesome service to our customers. We create value for the people that deal with us and therefore we should be fairly rewarded.

Most people also prefer to do the work that the business does rather than do the paperwork. People find doing the paperwork as boring. What we must understand that the paperwork is very important and it is critical that you are on top of that part of your business.

Many businesses also lack reporting systems and proper controls. Which then leads to an inability to manage cash flow and profit. Regarding the reporting systems and controls a basic example is that of debtors. You must be clear in your terms, pay attention to debtors and ensure all of your paperwork is correct.

I have seen many businesses whether it is here in Australia or overseas in New Zealand, USA, Canada and the UK pay little attention to their reporting systems. As a past friend of mine used to say:

“Which manager runs a business without looking at the numbers? Their important”.

Another interesting way of looking at it is driving your car without having a fuel gauge. You do not know whether you will ever run out of petrol. So we must be organized.

14.6% fail due to lack of management competence or experience

Might be the world’s best at their chosen occupation but that does not guarantee you’ll be a great manager. Lack of experience brings mistakes which in turn can create major problems. This on the positive side is a massive opportunity to learn as well. An opportunity exists to attend seminars and training sessions whenever possible. Continued education is one of the most important things you can do for you, your team and in turn for your business. The funny thing as well is that when you are continually educating yourselves then your customers will win as well.

It is important that you recognise your strengths and weaknesses. Being a guru at your service or your product does not make you good at running a business. You need to understand the market dynamics in regards to customers, competitors, suppliers, team, regulators etc and see how they will affect your business.

80% of the success of a business is the psychology of the leader. As leaders we must drive the business forward, train our team and ensure we add more value than anyone else.

The leader needs to be focused, be positive, they must delegate and ensure that they take action. You must increase your energy and you must act on opportunities.

12.4% fail due to inflation and economic conditions

Currency movements, interest rates and other financial mechanisms can cause a business to fail. Trading conditions can also be affected by local, national and regional events and then there are natural disasters. These things are all outside your control but can dramatically affect your business. If you are planning and thinking about your business that would help you be more aware of these things occurring around you.

The power to anticipate comes when you work ON and not in your business. You can limit the effects of the things outside your control by planning and anticipating.

One of the best ways to plan and implement is by working on and focusing on the 6 Secrets™ to any Business. The 6 Secrets™ to any Business do not only help in this area they help in all of the failure points that we are discussing in this paper. What are they you may be asking:

  1. Begin with the end in mind
  2. Planning for success
  3. Growing your business
  4. Managing your business
  5. Valuing your business
  6. Freedom

By focusing on the 6 Secrets™ you make your yourself, your team and your business more in tune with what is going on out in the market place and what could affect your business.

Please refer to part 2 of why do businesses fail and what to do about it.


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