Five Causes of Business Failure

Five Causes of Business FailureIn this guide we will see, among many, the five causes of business failure, a subject unfortunately nowadays increasingly topical because of the economic difficulties that have barely stopped to plague the economy of the US, but still pose multiple perils to the markets of Europe and emerging economies.

Make sure you have at hand:

  • Proper planning of capital management
  • Extra expenses
  • Extraordinary presence in the network of potential customers
  • Hiring professional management staff

1 Firstly let’s talk about the mismanagement of cash flow, especially for small businesses, which makes it impossible to pay all creditors and, thus, causes the accumulation of debts. This may be due to a lack of proper planning and capital and extraordinary costs, delayed billing, insufficient credit control, significant increases in inventory levels.

2 Secondly, another significant cause is the loss of the main commercial accounts resulting in decline in sales and profits. In this case the company will have to replace the loss of a customer immediately with another of the same revenues to avoid repercussions in revenues, which is not always possible to address. To make up for this shortfall many companies will offer discounts and delays in trying to generate sales, but that in the long run has a negative impact on cash flow that becomes impoverishing.

3 The lack of management control is another important reason. In fact, all businesses must have a strategic plan to ensure that they work in the best markets with correct margins and an appropriate level of financial resources. It may depend on the non-submission of statements, resulting in penalties and possible investigations allowing unnecessary customer discounts, the failure to develop a business plan, the lack of understanding of the costs, markets and key customers.

4 Another detractor is the investment in inadequate funding that pushes the company into serious difficulties. This problem will manifest itself more pronouncedly with the loss of a customer or a main activity will lead to a substantial interruption. In fact, all of the capital invested inadequately contributes to liquidity problems and the use of short-term overdrafts for the acquisition of long-term capital will hurt the cash fund even more.

5 Finally, another factor is emerging more and more: the absence of adequate company management to run the business. Such management, in fact, is very useful from the planning stage to the management itself, in the case where, for example, the management takes a proactive stance, management controls the situation and provides solutions, trying to minimize the possible bending of the economy, with a greater chance of survival for the company.

Never forget:

Management, teamwork and entrepreneurship are the motor carrier of each company.

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