Learn how to avoid common pitfalls that can lead to business failure. Discover preventable, unpredictable, and innovation-related reasons for company failure. Find valuable insights on capital management, creating a business plan, and more to ensure your business stays afloat.
The best thing you can do when something goes wrong is to stop and make conclusions to prevent something like that from happening in the future. Business failure is no exception. However, it is better to know the pitfalls in advance as most budding entrepreneurs make the same mistakes. In this post, we are going to talk about common errors that can be easily avoided to help your business go through initial troubled waters unaffected.
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Definition and Classification of Business Failures
An astounding 45% of businesses fail in the first five years. You can be outside that figure if you take measures to prevent the main pitfalls that ruin businesses.
First of all, let’s look at the situations that we refer to as business failure:
- The company is unable to pay its liabilities
- The majority of obligations cannot be performed
- The company’s expenses cannot be covered by sufficient cash flow
- The business has to stop or suspend its operations
- The company is wound up or declares bankruptcy
Are business failures unique? Well, the situations and circumstances may be different. However, we may conditionally subdivide the common reasons for failure into three categories.
Preventable reasons are those that can be prevented. These are usually related to non-compliance with regulated operations and business processes on the part of workers or business owners. Wrong actions resulting from negligence or poor qualifications usually result in such failures. They may be remedied as follows:
- Workers should act according to the to-do lists you prepare for them
- Quality assurance measures should be in place
- Appropriate training should be provided to the staff
- Take care to structure your business processes appropriately to ensure transparency and easy control
Unpredictable (inevitable) failures occur due to some factors beyond the influence of the business owner:
- Natural disasters
- Financial crises
- Limitations due to pandemics
- Modifications of the legal framework that affect the business activities
There is no way to foresee such circumstances – however, risks can still be mitigated by setting up a reserve, using different sales channels, and as much diversification as possible.
Innovation-related failures are typical of startups: a considerable amount is invested in new technology (including manufacturing, promotion, organization, or anything that has not been sufficiently tested yet) in order to get more profit. Results may range from success to failure, though.
The main reason for failure is that the company cannot get sufficient profit fast enough and has to invest in production for a long time. This depletes the company’s resources and may result in failure.
Now you know the categories of possible problems and you can work out a strategy that will help your business stay afloat in a hard situation rather than fail.
Common Reasons for Company Failure
Small businesses fail more often, and this is the reason why the problems listed below are mostly connected with small companies.
Not Enough Capital
Small businesses often face problems related to controlling receipts and withdrawal of funds. If this situation repeats quite often, it means that your business is at risk.
Floating capital is used in the company’s daily operations, and the current assets should exceed the current liabilities – or it is considered insufficient. If you run a small business, your accounts receivable that are due should not be too large or your company may fail to deal with daily expenses one day.
What can you do? Here are some tips:
- Make a realistic assessment of the company’s position
- Elaborate a viable monetary policy
- Analyze which items of expenditure may be eliminated
- Improve your qualifications in the sphere of finances
You can address a specialist to get a general idea of financial management.
Small businesses are often turned down by banks and cannot obtain credits if they were launched not a long time ago as they are regarded as high-risk ones. Of course, it may result in insufficient capital. You can make up a monetary reserve, elaborate a strategy, or create a transparent business plan to help you make both ends meet at the initial stages.
No Business Plan
One in five small/medium businesses cease to exist in the first year of their formation due to a lack of a well-thought-out business plan. An impressive figure, isn’t it? And it is hardly surprising: if a company has no goals to achieve, it does not go anywhere, so a business plan is a must!
Make sure you have a plan that contains:
- The aims your business will achieve
- The mission of your company
- The products and services you are going to offer
- The details on marketing and sales
- The description of how the company is going to enter the market
- The financial forecasts that prove the company’s viability
- Market research
- The business model you are going to use
- The organizational structure of your entity
- The risks you see and counter-measures
Lack of a clear plan means that you are hardly able to make grounded decisions and raise the funds you need to develop your company.
Make up a business plan to do at least three useful things:
- Formulate the company’s strategy you are going to realize in the long-term perspective
- Clearly see the future needs of your business
- Attract investors to realize your plans
Investors and bankers will scrutinize your business plan before they decide to part with their money, so make sure to work well on it!
Conclusion
You will find more useful information on typical errors of small business owners by clicking on the above link. If you have any issues with your international business, do not hesitate to book a one-on-one session with our experts and find a good solution to your problem!