Failure is common in most businesses. According to the Small Business Administration (SBA), around 33% of startups fail in the first two years and 50% in five years. Only 33% of small businesses make it to the 10th year or longer. But what causes businesses to fail? In this article, we explore five common reasons for business failure and how you can mitigate them.
1. Poor cash flow management
Failing to sustain healthy cash flow is one of the most significant reasons why most businesses fail within the first two years. Late invoicing, poor management of debtors, bad debt, and high stock levels often result in reduced cash flow. This makes it challenging to sustain day-to-day business operations, pay debts and expand the business, leading to the demise of your organization, so you should strive to manage and improve cash flow. Below are tips for successfully managing cash flow:
- Hire a virtual CFO to monitor cash flow and help you build your finance and accounting team and scale your company
- Lease equipment and real estate instead of buying
- Send invoices quickly
- Get your customers to pay their invoices on time. You could offer incentives, send reminders, and implement penalties to get clients to pay promptly.
- Build an emergency fund
- Check your customer’s creditworthiness before extending credit
2. Lack of adequate funding
Cash is always king when it comes to setting up, running, and expanding a business. Without adequate funding, or if you choose the wrong financing type, your organization will lack the “fuel” it needs to operate smoothly, leading to failure. For this reason, ensure you understand the variable and fixed expenses associated with starting and running a business when writing your business plan to help you prepare accordingly.
If you need to secure lender financing to fund your organization, you should do your due diligence and weigh your options before settling for a specific lending company to avoid high-interest loans that put your company into bad debt.
3. Failing to prioritize your customers
Even if you produce high-quality products and services, your business will likely only succeed if you put your customers first. To foster success, research your target customers, their needs, preferences, behaviors, pain points, and interests. You should also anticipate their future needs and provide products and services that solve customer problems.
4. Hiring the wrong employees
Hiring the wrong people for specific positions reduces productivity, increases absenteeism, negatively impacts customer service, and lowers profitability. Poor hires lower employee morale, creating the impression that you hire terrible employees. If you have a reputation for hiring the wrong people, it is harder to attract excellent talent and skills, eventually leading to business failure. Be sure to clearly define the position, create a recruitment strategy, test candidates, and perform reference and background checks to hire the right people.
5. Overreliance on a single client
Most business owners prioritize a few big clients, which often results in failure. This is because the client could suddenly pull out, affecting cash flow and profit. For this reason, you should focus on expanding your customer base.
Starting and running a company is challenging. Familiarizing yourself with the common reasons for business failure, including inadequate funding, poor cash flow management, and hiring the wrong person, can help mitigate them.