Business

5 Common Causes of Business Failure

According to statistics, 22% of new businesses fail during the first year, with 50% failing within the first five years. The failure rate of a company in its first operation year is 21.9% and 31.8% in its second year. Businesses that make it to the fourth year have about a 90% survival chance through every subsequent year.

Familiarizing yourself with why businesses fail can help you find ways to make yours thrive. Cash deficits, declining sales, loss of critical customers, increase in customer complaints, and extreme spending cuts are some of the business failure signs you should look out for. Here are five common causes of business failure.

1.    Poor cash flow

Cash flow issues overwhelmingly contribute to business failure. If your business expenses surpass the existing cash, you have a cash flow issue. To reverse your cash flow problems, start by categorizing your spending and then benchmarking to see how other businesses in your niche are spending and adjusting according to the available cash.

Consider micromanaging your spending by determining the cost-benefit of each expense. Don’t forget about a comprehensive forecast because it can help you achieve business growth efficiently and sustainably. Consult a virtual CFO if you have cash flow issues or are looking for strategies for more sustainable growth and improved profitability.

2.    Financial mismanagement

Business finances are the pillar of a business. For your business to survive and be profitable and successful in the long run, you should understand your finances. While sound financial planning makes businesses successful, financial mismanagement could be the reason for your company not surviving.

This means understanding your financial reports and making confident daily business decisions to ensure profitable and smart business choices. Consider learning financial skills from an excellent business financial coach to ensure your business’s financial health.

3.    Overdependence on one or a few big customers

Customer concentration can be risky for small businesses. This is because over-relying on one or a few big customers for revenue can cripple your business should these customers abruptly pull their orders. If you rely on these customers, your strategy is highly likely dictated by their needs and preferences, causing you to ignore the big market picture.

To avoid over-relying on one or a few big customers, understand your customer base well and rank every customer by their margin contribution, strategic fit, and growth potential. Consider spreading your revenues across different markets and geographical locations to leverage the opportunities.

4.    Inadequate or poor market research

Inadequate or poor market research may cause your business to fail mainly because you don’t understand your market or customers. Proper and adequate market research can help you learn about your customers and their purchasing habits, enabling you to sell more effectively, spot new opportunities, target new customers, and compete with other businesses in your industry.

5.    Lack of or poor planning

Planning is crucial for the success and growth of any business. A good business plan lets you focus on what can make your ideas succeed while helping you attain your long-term and short-term business objectives. It also enables you to raise finances for your business, make sound decisions, identify potential weaknesses, and more. Without a business plan, the chances of your business failing are pretty high.

Endnote

While every entrepreneur wants their business to flourish, there’s always the risk of failure. Familiarize yourself with these common causes of business failure and what you can do to avoid them.

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