Why businesses fail

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Despite a rising number of start-ups and a growing SME market, many businesses fall by the wayside before they reach their fifth year. John Playfair looks at some of the main reasons why businesses fail and offers an insight into the importance of taking proactive action

While there are many influences which can have an impact on whether a business succeeds or fails, it often comes down to the same three issues – management, management, management! Businesses can only thrive with an effective management team, which continually examines the external environment and the business offering to ensure it is fit for purpose and appropriate to current market demand, as well as ensuring that it is delivered effectively and efficiently. Getting a grip in the following key areas is critical to managing your business successfully.

Economic Conditions

Understanding the economic conditions, not just in your particular sector but more generally, is fundamental to ensuring the business survives. While you may not be able to control external factors, you need to be alert to issues such as market trends, dwindling opportunities, competitors, disruptive technologies or seasonal changes. This awareness will leave you well placed to position your business astutely, to meet a particular need, or to adapt an existing offering to respond to changing demands. By anticipating changes in the market and being fleet of foot to ensure you are always offering leading-edge services or products at the right price, businesses can withstand many of the challenges which come their way.

Funding & Cashflow

Funding issues are another major cause of businesses failing – either not having enough, or having an incorrect funding structure which doesn’t reflect the true needs of the business. Undercapitalised businesses will struggle to operate effectively if they are always short of cash for working capital or investment. Setting out the funding requirements within your business plan and continually reviewing it is crucial to success, yet most businesses will only do this when they are in difficulty. Trying to restructure from a position of weakness is never a good option, so it is always better to be on the front foot by planning ahead.

As part of this, getting a grip on cash flow is vitally important, as it is the lifeblood which carries oxygen around a business. Studies show that bad cash flow is the number one reason why businesses fail, yet most businesses tend to focus on profit rather than balancing outgoings with the amount of cash coming in.

Tuning In

Fundamentally, businesses struggle when the management team takes their eye off the ball in these crucial areas, often getting side-tracked into delivering day to day operations. In order to build and maintain a healthy business for the long term, it is vital to stay tuned-in to the heart of your business and keep a close eye on the environment in which you operate. Although a short article doesn’t allow for an exhaustive list of recommendations, management of the businesses is the key element that you must get right, and focusing on the priorities outlined will put you in a strong position to keep your business in good shape.

For more information about how we can help your business, please feel free to contact us.

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