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Why do businesses fail?

Authored by Andy Wood

Andy Wood

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Approximate read time: 4 minutes

I am often asked what causes businesses to fail? As you will imagine, there is no simple answer to this question.

In the vast majority of situations, it is not down to one specific event, but a combination of factors which over time if not resolved bring the business to an untimely end.
Retail, as we all know, has suffered from the onset of competition from online offerings
Retail, as we all know, has suffered from the onset of competition from online offerings making the worldwide web the biggest shop you can peruse from the comfort of your own home to on the bus and on a day out.

The out of date, and wholly unsustainable, business rates model that the UK follows does not help the cause, combined with the need for landlords to take a more realistic view on rents as more and more well-known retailers disappear from the High Street at an alarming rate.

Modern technology is leading to traditional industries, such as printers being squeezed out of the market as a greater number of businesses communicate by e-mail to both advertise and liaise with their customers and suppliers.

The digital business community is an exciting, and revenue generating, part of the economy, but sadly businesses which don’t move with the times are left behind.”

I have, however, come across many entrepreneurs, who whilst committed to their businesses, let the lines between business and personal expenditure become blurred and then find it impossible to rectify the position.

Directors don't always make the best management decisions

For example, I once came across a director who spent over £80,000 of company funds on his wedding, and another director who was desperate to start a family and caused the business to pay for several rounds of IVF treatment.

But perhaps the most bizarre was an individual, who lived with his wife and grown-up daughter at the weekend and then with his girlfriend and their young son in the week.

Not surprisingly the wife and daughter had no idea of the “second family” as they thought their husband/father, “worked away” in the week. The problem was that the directors business was paying for both families.

As the saying goes there is nowt as queer as folk!

According to research about four in ten small businesses don’t make it to their fifth anniversary.

These are grim statistics. And while there are a multitude of conditions that can result in a business failing, most small companies that go out of business make similar mistakes.

The top six reasons for small business failure:

  1. You started your business for the wrong reasons
    Did you start your own business to make a lot of money? To have more time with your family? So you wouldn’t have to answer to anyone else? These are not reasons to start a business.
  2. Poor Management
    New business owners frequently lack relevant business and management expertise in areas such as finance, purchasing, selling, production, and hiring and managing employees. If the business owner doesn’t recognize what they don’t do well, and seek help, the company many fail and go out of business.
  3. Insufficient Capital
    A common fatal mistake for many failed businesses is having insufficient operating funds. New business owners often don’t understand cash flow or underestimate how much money they will need for start-up and are forced to close before they have had a fair chance to succeed. Unrealistic expectations of incoming revenues from sales can also be a problem.
  4. Lack of planning
    It is critical for all businesses to have a business plan. It must be realistic and based on accurate, current information and educated projections for the future. Don’t forget tax bills, insurance and keep an eye on interest rates.
  5. Overexpansion
    This often happens when business owners confuse success with how fast they can expand their business. A focus on slow and steady growth is best. Many failures are caused by company’s expanding too rapidly.
  6. No Website and No Social Media Presence
    Simply, if you have a business today, you need a website and a social media presence.

The moral to the story is that as insolvency practitioners, we need to drill down into the root cause of why a business is struggling.

Where unusual circumstances prevail, treat those involved with dignity and respect and come to a solution, which, where possible, gives an opportunity to the business, and therefore the creditors, to return to a sustainable position.

Often the entrepreneur knows that the position is not sustainable and needs, and often welcomes, the input of a professional to bring the business back into kilter.

It has certainly made life interesting but also challenging over the years.

If you are facing a challenging financial position and need the reassurance of an initial free-of-charge meeting, held in a caring and understanding manner, contact us today.

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