Main Causes Of Business Failure

Understanding the common reasons of business failure will help create a successful business plan that will avoid these pitfalls and secure business profits. Complementary reading: How To Avoid Business Failure.

STATISTICS…

Estimates are that one in three new small businesses in most western countries fail in their first year of operation, two out of four by the end of the second year, and three out of four by the fifth year.

These statistics should cause no surprise when you consider that only a small number of businesses carry out a feasibility study and prepare a business plan before they start their business.

Estimates are that only 3 to 5 per cent of small businesses starting from scratch prepare a business plan – that is, know that their business is feasible and have a formal plan to run that business.

COMMON CAUSES OF BUSINESS FAILURE

(In order of frequency)

Financial Management:

The single largest contributor to business failure.

It is responsible for about 32 per cent of all business failures.

The range of problems that combine to make up financial management are:

• Lack of business experience
• Cash flow problems
• Being undercapitalized at the start
• Excessive private drawings
• Overuse of credit
• Lack of budgets
• Failure to make provision for tax payments

Incompetent Management:

Is the cause of about 15 per cent of business failures. Largely arising from lack of experience.

Inaccurate or Inadequate Records:

About 12 per cent of small businesses fail due issues with their record keeping. And in some cases, books and records are completely absent.

Ineffective Sales and Marketing Problems:

Undermine 11 per cent of businesses. This mainly due to:

• Poor promotion
• Inability to cope with seasonal factors
• Insufficient knowledge of competitors

Staffing Problems:

These account for 9 per cent of business failures, including lack of supervision.

General economic conditions:

Can cause in 12 per cent of business failures (pre-pandemic).

Personal Factors:

These accounts for about 6 per cent of business failures, including divorce, illness (pre-pandemic) and changed personal situation.

OTHER CAUSES OF BUSINESS FAILURE

Other frequent causes of business failure include:

• Insufficient sales, too few customers compared to the cost of operating.
• Bad costing, delayed invoicing.
• Poor location and lack of customer convenience.
• Inventory problems – slow moving or dead stock and short-fails.
• Giving too much credit, resulting in bad debts and slow payment.
• Inability to borrow funds.
• Let down by suppliers, inability to obtain raw materials as required.
• Poor staff, customer and public relations.
• Poor promotion, marketing and advertising causing poor image.
• Poor quality workmanship, inadequate quality management.
• Lack of industry or product knowledge, or lack of knowledge of market forces.
• Poor cash control and pilfering of goods/cash/profits/company information.

CONCLUSION

In most cases, it is a combination of several factors that ultimately results in business failure. Often many of these causes merge or shade off into one another, leading to something like a chain effect.

So, any entrepreneur keen on avoiding these traps should first of all do a feasibility study and then, depending on the results, determine their strengths and weaknesses (SWOT analysis) and create a formal business plan.