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Five Reasons Why Companies Fail

Jun 25Danny Windsor

An article in the Houston Chronicle (http://smallbusiness.chron.com/businesses-high-failure-rates-61640.html) stated that,  “according to the U.S. Small Business Administration, 70 percent of new businesses survive at least two years, but that drops to 50 percent by the five-year mark and 33 percent at the 10-year point, with just 25 percent lasting 15 years or more.”  There are a number of reasons for this high failure rate but I would like to point out five of the more prominent reasons below.

  • Lack of preparation– Too many companies “shoot from the hip” and do not take the time to plan for the future and prepare accordingly.  Planning involves thinking through all areas of the business (sales, marketing, operations, and finance), anticipating challenges and how these will be dealt with before they arrive.
  • Ignoring warning signs– By warning signs I mean the standards and measurements set during the planning phase that indicates success is being attained.  Examples of these vital measurements include sales percentage growth and diversification, customer satisfaction, cash liquidity ratios, and adequate profit margins.  Failure to attain minimum standards in these and other areas are often ignored until too late for the business to recover.
  • Running out of cash– Cash is the lifeblood of every business.  Cash flow should be forecasted on a continual basis so management knows the estimated cash balance one, two, three months or even longer into the future.  Regardless of everything else that may be right in a company; a lack of adequate cash will stop everything in its tracks and result in failure.
  • Inadequate profit margins– Every business owner should know every month the exact profit margins of the business.  The gross margin is particularly important because this margin determines if profits are adequate to cover the fixed operating expenses of the business and the breakeven sales level.  A low gross profit margin will result in failure.
  • Zero or declining sales– Someone has stated that everything starts with sales,  no sales- no business.  A major factor in a lack of sales results from the business owner ( the visionary, the finder) becoming distracted in areas of the business that takes him or her away from growing the sales and building the vital customer relationships.  Hire the right people, put them in the right places, and allow them to do their job so you, the owner, can do yours.

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