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Is it ever “right” for a company to fail?

Is it ever “right” for a company to fail?

Authored by Phil Meekin

Phil Meekin

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Approximate read time: 3 minutes

Wilson Field’s day to day work, and main concern, is usually to help save businesses that are experiencing problems.

But occasionally there can be a situation when a failing business can be doing more damage to its market as a whole, and ceasing trading is the best option.

Some troubled businesses in the final period of existence, which can be over weeks or months, try desperate measures in a bid to bring in cash.

In a futile attempt to survive, these companies will bid for contracts at non-commercial, and often loss making, rates. They do this to try and bring in the chance of winning work and generating any amount of revenue.

Some business owners, worried their business isn’t performing as well as hoped, undercut competition to attract a client base boosting income. But if these low prices mean their profit margins are on the decline, it may be a false economy quickly bringing the business to its knees.

It can be tempting to price products and services below those of competitors to win work and turn around the company’s fortunes. But low can be too low. It can make it impossible for the business to even stay in the black, let alone turn a profit.

It may buy a bit of time, but this approach is unsustainable.

Pricing  products and services correctly in the first place is often the difference between staying afloat and going under. And when you consider one in three new businesses fail due to poor financial decision-making; pricing correctly isn’t an option, it’s a must.

Dropping rates is not only dangerous to the business but to the market sector as a whole. Eventually it is inevitable that the insolvent company will fail, but it can often leave other casualties behind.

Other viable, competing companies struggle to attract work in this time period at realistic prices. The knock on effect can be devastating for an industry which has under-priced itself.

Companies who undercharge make it worse for others to do business as they skew consumer perceptions of the value of services and products.

Ultimately the market does return to normal but can leave a wake of destruction, causing previously-viable businesses to fail.

The desperation to survive at any cost is a strategy that doesn’t work. It is unrealistic, and usually down to inexperience and poor management skills. Trading at a loss may at best generate short-term cash gains but is a recipe for disaster.

The first thing that’s often required in troubled times is for business owners to seek professional advice. A good mantra is “don’t do business if you’re not making money”. It is easy to be a busy fool. Directors need to be clear and focus on what they’re good at and how they make money.

Lots of people focus on doing the deal to be busy or see immediate cash flow forgetting about finding profitable business; this could be a mistake which causes any business to fail rapidly.

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