Why do businesses fail?
By: Tony Busch
Cash Flow Matters…
Why do businesses fail?
May 1, 2005 3RD Volume
There are many risks entrepreneurs face as they launch or grow their business ventures. Knowing why businesses fail can be a fair warning to business owners to avoid making the same mistakes others have made.
One study conducted by a group of professionals who surveyed several dozen individuals and organizations including the SBA and SCORE found that the reasons for failure can be categorized in four areas. This list represents the most frequent reasons why businesses failed or were failing to grow.
General Business Factors 78% - Lack of a well-developed business plan, including research on the business before starting it (on the market’s willingness to buy, costs, etc.). 73% - Being overly optimistic – about achievable sales, money required to do the things that need to be done to be successful. 63% - Insufficient relevant and applicable business experience. 70% - Not recognizing, or ignoring, what they don’t do well and not seeking help from those who do have expertise.
Financial Factors 79% - Starting with too little money. 82% - Poor cash flow management skills and/or poor understanding of the cash flow of the business. 77% - Not pricing properly – failure to include all necessary costs when setting prices (break-even).
Marketing Factors 64% - Minimizing the importance of promoting the business properly and effectively (marketing). 55% - Not understanding who your competition is or ignoring competition. 47% - Too much focus on reliance on one customer/ client.
Human Resource Factors 58% - Inability to delegate properly and effectively. 56% - Hiring the people with insufficient skills.
In reviewing this list of the most common reasons why businesses fail, it is critical that the entrepreneur manage all aspects of the business on a regular basis. Clearly, the top reasons why a business fails lie in the Financial Factors area. The number one reason business owners fail is due to their lack of understanding of the principles of cash flow and, more specifically, the impact of business decisions on their business cash flow
Many entrepreneurs are very good at what they do in their business, but they do not always have a sound understanding of their financial situation (cash flow) and they do not know how to effectively communicate the performance and the challenges of their business to their lender.
Each day the business owner is asked to make dozens of decisions regarding the business. These decisions can be as simple as whether or not to negotiate a price with a customer for a relatively small transaction to deciding whether or not to hire more staff, add or discontinue a product line, or increase the marketing budget for the next month. Large or small, all these decisions add up to make for a profitable or non- profitable business venture. Clearly, as the table above demonstrates, if the business owner is making these decisions without sufficient financial information, there is a greater risk of significant damage to the business or, eventually, failure. Many business owners find that an annual budget with monthly measurements to that budget are vital to their success.
If you are having a difficult time gaining an understanding of the cash flow of your business, please consult with someone who can assist you with this critical dimension of your business. Such advice is very important to the continuation of your business, to improved profitability and to effectively communicating the performance of your business to your lender.
At PrioraTM Cash Flow Management, we will work with you and your staff to educate and advise you as to how to improve the cash flow of your business in order to achieve greater profitability and to effectively communicate that information to your lender.
You can reach us at 920-734-8531 or email us at tony@prioracfm.com. Visit our web site at www.prioracfm.com to learn more about our services. We will be happy to give you a free consultation.
Cash Flow Matters…
Why do businesses fail?
May 1, 2005 3RD Volume
There are many risks entrepreneurs face as they launch or grow their business ventures. Knowing why businesses fail can be a fair warning to business owners to avoid making the same mistakes others have made.
One study conducted by a group of professionals who surveyed several dozen individuals and organizations including the SBA and SCORE found that the reasons for failure can be categorized in four areas. This list represents the most frequent reasons why businesses failed or were failing to grow.
General Business Factors 78% - Lack of a well-developed business plan, including research on the business before starting it (on the market’s willingness to buy, costs, etc.). 73% - Being overly optimistic – about achievable sales, money required to do the things that need to be done to be successful. 63% - Insufficient relevant and applicable business experience. 70% - Not recognizing, or ignoring, what they don’t do well and not seeking help from those who do have expertise.
Financial Factors 79% - Starting with too little money. 82% - Poor cash flow management skills and/or poor understanding of the cash flow of the business. 77% - Not pricing properly – failure to include all necessary costs when setting prices (break-even).
Marketing Factors 64% - Minimizing the importance of promoting the business properly and effectively (marketing). 55% - Not understanding who your competition is or ignoring competition. 47% - Too much focus on reliance on one customer/ client.
Human Resource Factors 58% - Inability to delegate properly and effectively. 56% - Hiring the people with insufficient skills.
In reviewing this list of the most common reasons why businesses fail, it is critical that the entrepreneur manage all aspects of the business on a regular basis. Clearly, the top reasons why a business fails lie in the Financial Factors area. The number one reason business owners fail is due to their lack of understanding of the principles of cash flow and, more specifically, the impact of business decisions on their business cash flow
Many entrepreneurs are very good at what they do in their business, but they do not always have a sound understanding of their financial situation (cash flow) and they do not know how to effectively communicate the performance and the challenges of their business to their lender.
Each day the business owner is asked to make dozens of decisions regarding the business. These decisions can be as simple as whether or not to negotiate a price with a customer for a relatively small transaction to deciding whether or not to hire more staff, add or discontinue a product line, or increase the marketing budget for the next month. Large or small, all these decisions add up to make for a profitable or non- profitable business venture. Clearly, as the table above demonstrates, if the business owner is making these decisions without sufficient financial information, there is a greater risk of significant damage to the business or, eventually, failure. Many business owners find that an annual budget with monthly measurements to that budget are vital to their success.
If you are having a difficult time gaining an understanding of the cash flow of your business, please consult with someone who can assist you with this critical dimension of your business. Such advice is very important to the continuation of your business, to improved profitability and to effectively communicating the performance of your business to your lender.
At PrioraTM Cash Flow Management, we will work with you and your staff to educate and advise you as to how to improve the cash flow of your business in order to achieve greater profitability and to effectively communicate that information to your lender.
You can reach us at 920-734-8531 or email us at tony@prioracfm.com. Visit our web site at www.prioracfm.com to learn more about our services. We will be happy to give you a free consultation.
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