There are a multitude of reasons why a business can fail, lack of sales, lack of branding, lack of motivation. However, most of these result from the true reasons for business failure, listed below!
These are the “root cause” reasons for business failure, and with the hope of making you aware of what you need to avoid in order to be successful with your business venture, we are going to analyse them further.
Cashflow is the number one killer of a business!
If you can’t meet your financial obligations, being loans, supplier payments and other bills, due to poor cashflow management, you will have those creditors knocking on your door wanting their payment for goods pretty quick. After all they are replying on your payment for their business to succeed too.
In Australia, if you owe someone more than $5,000 they can apply to have you made bankrupt! So probably best to avoid this situation, particularly if you are just starting out in business. The long term repercussions of bankruptcy, including poor credit rating and reputation loss, are difficult to overcome.
Consideration needs to be given to how you will get through the start up phase of your business, and pay your creditors ensuring you have enough cash behind you while your revenue grows. This period can be particularly tricky, particularly while trying to grow and establish your brand and reputation, while building your business to be sustainable in its own right.
Having adequate cashflow tools in order to predict when bills and payments will be due and if you will have enough income to cover those outflows is vital for any business. A simple spreadsheet set up for inflows and outflows due, might be all you need to get a high level perspective of what is required and when, in the coming months. There are also plenty of accounting packages that help you assess your cashflow.
Depending on your business position, cashflow management should be looked at weekly, if not daily, to ensure you are on top of it before the creditors come knocking.
Lack of business plan and strategy
Your business needs direction! And with proper planning and strategy implementation, you will stay on track to achieving what you set out to do.
Long term goals need to be set, and then broken down to achievable chunks with a path out lined as to how you are going to achieve them. These goals also need to be achievable, otherwise what motivation will you have to succeed if you set goals you would never be able to reach?
Your business plan and strategy is a live document, and should be updated regularly to make sure your direction is focused. Reassessing your plan every six months (possibly more regularly), will help make sure your goals are still relevant, and will also enable you to identify when you are headed off track. This will allow you to refocus your business towards the goals you set out to achieve.
You don’t need to spend a lot of money on consultants to put together a business plan, there are simple easy to use documents readily available, including this one from Business Propel. Business Propel is a not for profit organisation with your business success its primary focus.
If you don’t have a basic understanding of your money coming in and expenses going out, you have no idea if your business is struggling. Particularly when it comes to expenses.
Spending haphazardly with no budget, or allocation of cash to certain expenses, will sooner or later drag a business under. You need to understand what you are spending your money on, and if the spend is necessary for the business, this ties in well with cashflow above.
I can’t stress enough how important knowing your business figures is! You need to know this so you can direct your business accordingly, you need to know this if you are looking to secure new capital, and you need to know this so you can leverage off what you business is telling you!
Through earning revenue and incurring expenses, this is how your business communicates with you, its owner! So you need the right tools to know how to read what your business is saying. And this is where a great accounting package comes in!
My pick for accounting software, is MYOB, which is why I have partnered with them. For a small monthly fee, you will have access to the health of your business and an understanding of what it is saying. Through easy to read reporting you will be able to make informed timely decisions, through analysing various reports including cashflow, profit and loss and balance sheet. MYOB also offers an array of other functions in order to support you in making business decisions.
If you would like to know more about the benefits of MYOB for your business, or are interested in the implementation please email me at email@example.com and we can look at suiting MYOB to your business needs.
A budget is an estimate of income and expenses for a specific period!
To be able to budget you need to know what you are expecting to have come in from a revenue point of view, and have a pretty good idea of what your set expenses for the specified period are as well. This is different to cashflow, as cashflow is making sure you have the money to cover your expenses as they fall due. While a budget looks more broadly at overall business performance. Essentially a budget will tell you if your business is expected to make a profit or loss in the period you are looking to an analyse.
Budgets can be based on historical figures, which you should have access to if you have kept track of income and expenses through book keeping or accounting packages. When starting out, budgets are a little harder to put together, as its difficult to model how your business will perform if you have nothing to compare it too.
Your budget can then be adjusted for specific “events” that you know are going to encounter. For example if you wanted to buy some new equipment, you would put this in your budget. Then after accounting for all income and expenses, including the new equipment, the end figure will result in a profit or loss, showing you if the purchase is going to put some pressure on you from a cash stand point. This may lead to seeking some further capital, or loan to cover the cost of the equipment.
If you don’t budget as accurately as possible, you won’t be able to know what you can and can’t afford for a period. You also won’t be able to identify if you may need to push harder in gaining more business, particularly if expenses are higher than revenue and you need to cover this. Failing to meet your expense obligations, result in cashflow problems, and we have discussed the implication of cashflow problems above.
Budgets should be set on an at least annual basis for a high level look at your businesses expected health, then broken down to monthly or weekly budgets, depending on the size of your business.
Again, a good accounting package will help you formulate a budget and can be updated as time progresses to take into consideration what your business is telling you.
No business environment awareness
Lack of awareness in your business environment, can be very costly to your business. Not being up to date with trends in your niche, or knowing when things have become obsolete can quickly in turn make your business obsolete. For example, technology is moving so fast these days that your competition may already have the quickest and flashiest new system that will increase their turnover, or attract customers. So you need to be ready to step up! In an ever-changing business world any advantage you can gain will be a good one.
You also need to consider how your business is financed. If you are leveraged with bank loans, you need to be aware of the changing economic environment and interest rates. Will you be able to afford the additional interest expense should rates increase? What will be the impact to your business? This is also where good budgeting will come into play. If you have an accurate budget you will be able to know if your business can handle any changes to your own business environment.
On the flip side, if your business is growing so fast, how are you going to keep up with it? Do you need to consider bring in additional resources to cope? And how would you fund those resources? Through investments or through loans? So many considerations, right?!
Its vital to have your finger on the pulse of your business environment so you can predict or react to changes as soon as there is a whiff of something new in the air.
Yes you can run a business that will be relative successful even if you don’t believe or have a passion for what you are doing. Many small businesses do succeed in this way, look at the franchise opportunities out there, I wouldn’t say everyone is passionate about making pizza or sub sandwiches. But in the right location, some of these can be pretty lucrative! Some business opportunities are a means to an end.
But if you are passionate about what you are doing, you will be emotionally invested in the business’ success and therefore the chances of failure are reduced. If you love what you do, you will want to see your business succeed and will consciously or even subconsciously be a walking advocate for your business. People will want to know what drives you, and want to hear about your story. In turn creating a great promotion for your business and potential increased sales. So, if you make sure you are passionate about your business you are already well on your way to making it a success.
Being in business is like being on a roller coaster, it can be an exhilarating ride or it can be daunting and scary.
Being aware of the reasons for business failure will ensure that you can implement adequate controls to avoid the pitfalls the ride can bring. With the right planning, reporting and accounting package, you will know how to respond when your business needs you too, and by making informed decisions your business ride will hopefully be a fun, successful and long one.
How do you make sure your business avoids the reasons for business failure listed above? Feel free to share your tips in the comments below.