Finance and Accounting

8 financial reasons why businesses fail.

Why do so many businesses fail? It's a sad fact but a large proportion of small businesses will not survive.

But it's still big business starting you own business and all new business starters should learn from the mistakes of others and try not to make the same errors.

So why do so many businesses fail and continue to provide fodder for the liquidators?  Let's look at the main reasons for business failure and hopefully become more aware of the pitfalls.

NUMBER 1 - POOR BOOKKEEPING

This is a major contributor to small business insolvency. It not only relates to recording transactions but also tax compliance. Debt to the ATO if not recorded properly doesn't appear in the accounts, BUT it is still payable.

Business should review their position regularly and be aware of changes in the market so they themselves can make changes. Forecasting IS important as you cannot steer a steady course if you have no destination in mind.

NUMBER 2 - CASH DEMANDS

For a new business there are many demands for cash often before the first customer appears. It is important to plan the new business and ensure sufficient capital is available. Rapid growth means increasing capital requirements to cover stock staff etc.

Too much reliance on debt funding to either start or buy a business is a risky strategy with little room for error in a downturn.

NUMBER 3 - A FEW LARGE CUSTOMERS

If you have a few key clients contributing a major part of your income you are exposed as the failure of one of these clients strikes a major blow to turnover. Don't lose focus on the smaller to average sized clients as these may grow.

NUMBER 4 - MANAGERIAL SKILLS

Many business failures can be attributed to lack of business ability. The small business owner is often an expert in his trade but not cut out to run a business. To succeed you need many other skills and if you don't have them, then surround yourself with people who do.

NUMBER 5 - THE ECONOMY

This is often outside the control of the business owner but a constant awareness of how the economy is affecting the business and the position and actions of competitors is critical. You need to have an eye on external strategic issues and not just be concerned with internal matters.

NUMBER 6 - GETTING CUSTOMERS TO PAY

When offering credit a small business must have tight control over what is effectively their life blood. Often it is a balancing act trying not to upset clients but getting hem to pay. Hard decisions may need to be made on some clients.

NUMBER 7 - HEALTH PROBLEMS

Running a small business can often prove stressful for many reasons and this may lead to health problems. Steps can be taken to minimise the impact on the business by having adequate insurance and also ensuring the business is able to run in your absence.

NUMBER 8 - FAILURE TO SEEK PROFESSIONAL ADVICE

When under pressure or when lean times are ahead professional advice should be sort immediately. An accountant or Financial Controller can assist with the hard decisions to prevent the situation worsening.

It is imperative to know when enough is enough. Insolvency laws provide the opportunity for struggling businesses to make a graceful exit rather than pushing on and making matters worse. An early call to action of a liquidator can often avert the inevitable.

The unfortunate reality for any small business particularly early on is the risk of failure. The chances of failure cannot be underestimated no matter the nature of the business. The fundamentals remain the same.

We should aim not to repeat the same old mistakes as those before us.

For more information call Ross Wakelin on 0432 302 774 or This email address is being protected from spambots. You need JavaScript enabled to view it..

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