Five Main Common Causes of Business Failure

Five Common Causes of Business Failure

Failure won’t be at the front of many business owners’ minds when they launch a company. However, with four in ten UK businesses struggling to make it past five years, it’s always worth keeping an eye on the warning signs. In this article, management accountant Kirsty Fitzgerald outlines the five bad practices to avoid if you wish to give your business a fighting chance of success.

Poor cash flow management

You may be sick of being told “cash is king”, but it doesn’t change the fact that poor cash flow management can lead to the demise of any business. Indeed, even a profitable business can fall victim to a crippling cash flow crisis, which is often caused by the ineffective management of debtors, high stock levels, bad debt and late invoicing. Inadequate financing – or selecting the wrong type of funding for your business – can also put it on the path to failure. Without access to sufficient growth capital, whether in the form of personal savings, private equity or debt finance, your business may not have the “fuel” it needs to grow.

Losing control of the finances

Any business owner needs to be aware of their financials and cash position at any given time. The accurate forecasting of income and costs may lead to a few surprises, but it will ultimately help support your cash flow. Business owners should also understand and control their costs – acknowledging risks and opportunities – which should help minimise any nasty surprises. Employing an experienced accountant, or investing in a good cloud-based accounting solution, can help ease the burden of financial management, allowing you to focus on day-to-day business operations.

Bad planning and a lack of strategy

“Failing to plan is planning to fail” – cheesy but true. Quite simply, long-term planning is key to the success of any business. When mapping out the growth of their business, a business owner needs to conduct market research to establish who their customers are and what they need. They also need to recognise their competitors and be proactive regarding trends, to avoid getting left behind. Just look at the numerous bricks-and-mortar retailers that didn’t adapt quickly enough to changing customer shopping habits and are now struggling or have gone under as a result.

Weak leadership

A good leader recognises the skills they lack or the jobs they do not have time for and either employs, outsources or seeks professional advice to fill those gaps. They will also communicate, direct, reward and offer the opportunity for personal growth to their employees, creating a happy, effective and loyal team. Poor leadership, on the other hand, leads to demotivated and ineffective teams, which can easily cripple a business.

Overdependence on a few big customers

An overdependence on a few big customers could easily lead to business failure if one of them suddenly pulls out – both cash flow and profit will ultimately be hit. The temptation could then be to offer discounts to that customer; however, this will only lead to poor margins over the longer term. Minimise your risk by increasing your customer base, diversifying your product portfolio and encouraging your customers to sign contracts with a reasonable notice period.

Here at London & Zurich, we work closely with business of all sizes, assisting them with everything from cash flow management to payment processing. For more information on our Direct Debit and card payment solutions, don’t hesitate to get in touch today.