List and describe the 4 most common reasons for business failure?

Answer 1

Reasons For Business Failure: Why Do Businesses Fail?

Half of small businesses fail within the first three years because of cash flow problems. They either run out of money or run out time. Consumer debt may be rising and personal bankruptcies increasing as a direct result, but company insolvencies are also on the increase. So why do businesses fail?

The main reason is money: lack of it, or lack of it when it's most needed (for example, work may have been completed and invoiced for, but that invoice may not be paid for up to 60 days, and creditors may want their own payments from you immediately. There are many solutions to help businesses improve their cash flow, from factoring and invoice discounting to more effective budgeting, but many businesses leave it too late. And it is small businesses who suffer most, as they are less easy to rescue than larger companies. Poor management, poor accounting systems, poor market research - they all share the blame for business failure. And losing control of a market due to competitor strength is another key reason. Manufacturing, retail and transport and communication businesses can be affected my natural disasters in countries where materials and products are sourced from or a weak pound on the stock exchange. Other key reasons for business failure include: * Lack of market research when entering new markets, resulting in poor sales and return on investment.

* Overspending. Or spending too much on frivolous luxuries instead of products and services that improve the bottom line.

* Poor cash flow control: paying creditors to early, buying too much stock or giving customers payment terms that are too long, late payments and bad debts. These can all lead to a lack of working capital and cash flow problems.

* Failure to listen to customers. For example, you may manufacture a product, set it at a certain price and get a stand at a targeted exhibition. Your customers may tell you that they love the product but find it a bit too expensive. The children of your customers might be thrilled by your product. If this were the case you'd be foolish to ignore your customers. Far better to bring down the price and create a children's version of your product at an even lower price point. Listen to your customers and adapt accordingly.

* Failure to pay taxes or 'crown taxes' including PAYE and VAT. The fines for not paying these taxes can wipe out a small business fairly swiftly.

* Growing too quickly or too slowly. You can end up overtrading or undertrading - getting in too much stock or too little stock. It is best to be busting at the seems before you grow, and most business leaders suggest organic growth as the safest option in business growth.

* Lack of innovation. Some businesses never change, but they lose their market share when a new company comes along with a new way of doing things. Take Courts and other traditional furniture stores. They stayed the same, it was comfortable, and they didn't see IKEA coming. And bang goes their market share as millions of their loyal customers traipse off to fill their trollies with modern and affordable stuff.

* Loss of financial support/investment. If an investor pulls out, you may find it hard to attract another one in time.

* Lack of sales/profit and/or a rise in costs, especially if unprepared for a dip in sales or an increase in expenditure.

There are many more reasons, from rising stock levels and static sales to contract disputes and under pricing. And the best way to avoid them all is to plan ahead. ---- ALSO # Lack of direction. Business owners often fail to establish clear goals and create plans to achieve those goals, especially before starting out, when they fail to develop a complete business plan before launching their company. # Impatience. This occurs when business owners try to accomplish too much too soon, or expect to get results far faster than is truly possible. A good rule to remember is that everything costs twice as much and takes three times as long as expected. # Greed. When entrepreneurs try to charge too much to make a lot of money in a short period of time, failure isn't far behind. # Taking action without thinking it through first. An entrepreneur acts impetuously and makes costly mistakes that eventually cause the business to fail. # Poor cost control. An entrepreneur spends too much, especially in the early stages, and spends all their startup capital money before achieving profitability. # Poor product quality. This makes it difficult to sell and difficult to get repeat business.

Insufficient working capital. An entrepreneur expects--and requires--immediate, positive cash flow that doesn't occur, leading to the failure of the business. # Bad or nonexistent budgeting. An entrepreneur fails to develop written budgets for operations that include all possible expenses. # Inadequate financial records. An entrepreneur fails to set up a bookkeeping or accounting system from the beginning. # Loss of momentum in the sales department. This leads to a decline in cash flow and the eventual collapse of the enterprise. # Failure to anticipate market trends. An entrepreneur doesn't recognize changes in demand, customer preferences or the economic situation. # Lack of managerial ability or experience. An entrepreneur doesn't know or understand the important skills it takes to run a business. # Indecisiveness. An entrepreneur is unable to make key decisions in the face of difficulties, or decisions are delayed or improperly made because of concern for the opinions or feelings of other people. # Bad human relations. Personal problems and conflict with staff, suppliers, creditors and customers can easily lead to business failure. # Diffusion of effort. An entrepreneur tries to do too many things, thus failing to set priorities and focus on high-value tasks.