Thoughtful Thursdays FAQ - Why do businesses fail?

One of the subjects we often get asked about by people wanting to start up businesses is why so many start-ups fail. We would rather talk about the ingredients for success, but let's examine the question as asked by our customers.

When the dust has settled, the reason why businesses fail is that they run out of money. Of course there are many reasons this can happen. Before we get into some reasons let's make some assumptions:

1. The business idea has been researched, a market for the proposed product and/or service exists and proposed pricing supports the idea.
2. Sufficient capital is available to fund anticipated start up costs
3. A sound business plan has been written.
4. Going out of business was not by choice.

The point here is, if everything is on the up and up, what can go wrong? Let's look at the reasons a business runs out of money. If we examine cash flow, there will probably be a growing negative monthly balance eventually leading to an overall negative cash situation. In other words more money is going out than is coming in.

On a basic level, the combination of  sales or the collection of monies owed is being outstripped by expenses.

What can cause poor sales?
Why are accounts receivable not being collected?
What is costing so much?

The earlier you discover the bad news, the better. Keep good records and review the finances on a regular basis. If sales are not coming in as expected, review your targets and develop a plan that will accelerate the sales cycle. If the sales cycle is longer than expected, develop a plan to increase prospect generation.

If receivables getting out of control, don't be afraid of placing delinquent accounts on credit hold. Get out and start collecting what is owed. Consider hiring a service to help. Review all accounts and set high credit exposure limits.

Examine your expenses carefully and determine where money can be saved. Control petty cash expenditures. Rank your suppliers in order of dollar volume and set a goal to reduce costs by a chosen percentage starting with your largest supplier.

There are numerous reasons businesses do not succeed. Minimize the chances of being a statistic by paying attention to the numbers and taking the time to know the details.

Don't be the last to know there is trouble on the horizon.

Good selling,
Richard