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Cause of Small Business Failures

If you visit a construction site or a chemical plant, you might see some warning signs. These signs are called “red flags” and they alert you of impending danger. Just as there are red flags in life, so are they also in business. In business, red flags are there to save us but most of the time we ignore it.

“Failure is an opportunity to begin again more intelligently.”

In the process of starting a business, there are signs of business failure you must watch out for. I am going to reveal this signs to you. Whenever you see these danger signs in your business, you must act fast.


10 Cause of Small Business Failures

1. High Debt Ratio

*           The first cause of business failures you must watch out for is high debt ratio. If your business is being owed much, maybe by giving too much credit to customers, then your business is at risk. Also, if your business is heavily indebted, then it’s at risk of folding up. An antidote to this is for you as an entrepreneur to always carry out an acid test ratio and keep a keen eye on the debt to equity ratio.

“There is one paradoxical characteristic every entrepreneur must possess to succeed. An entrepreneur must be able to persuade his debtors to pay their debts promptly and at the same, must tactically delay payments to his creditors.”


2. High level of mismanagement

*          The second cause of business failures is high level of mismanagement. If your key staff lacks professionalism, then your business is in trouble. Since your staff are in charge of running the day to day affairs of your business, their professionalism should not be compromised for anything.

“There will be times when you will have to be abrasive, even brutal to members of your staff. Don’t worry that your people will say bad things about you because of this. They already have. But in general, try to be pleasant and accommodating. Try to please the greatest number who work for you that you can; antagonize the fewest. Blow smoke.”


3. Unexpected resignation of staff

*           The third to watch out for is the unexpected resignation of staff from sensitive position. This can really pose a threat to your business so you must be prepared for it. In business, poaching is really a factor to deal with. Big companies are always poaching good employees away from other companies by enticing them with improved salaries and incentives.

“The competition to hire the best will increase in the years ahead. Companies that give extra flexibility to their employees will have the edge in this area.”


4. Inadequate Inventory

*          Another factor that leads to small business failures is inadequate stock or inventory. I don’t need to emphasize much on this because the point is clear. If you have inadequate stock either for production or for your customers, your business is bound for failure. Also; if you stock too much inventory, you are still bound to fail because you are tying down working capital.

“Inventories can be managed but people must be led.”


5. Selling products below cost price

*           The fifth cause of business failures is the sales of goods and services below cost price. Sometimes in business, cash crunch, fierce competition or economic factor make businesses sell their goods below cost price and this can ruin your business.


6. Dwindling working capital

*          Dwindling working capital also cause of business failures and you must watch out for. Depreciating working capital may be as a result of unnecessary expenditure, too much inventory and weak cash flow management on the part of the entrepreneur.


7. Consistent negative cash flow

*          The seventh factor that could lead to business failure is consistent negative cash flow. Cash flow is to business what blood is to humans. No business can survive without strong cash flow management. A solution to negative cash flow is to hire a professional accountant to keep a keen eye on the cash flow.

“The most important word in the world of money is cash flow. The second most important word is leverage.”


8. Declining Profit

*          Declining Profit, if not handled properly can cause business failure. If there is a down turn in profit margins due to competition or deflation, your business could be negatively affected. A solution to declining profit is to increase your sales volume so you can make more profit on turnover or better still; diversify.


9. Loss of market share

*          Loss of market share is the ninth cause of most business failures. If you observe you are losing your market share due to either competition, new technology, innovation or trend, then this is a sign that your business is on the verge of been liquidated.

“Your greatest and most powerful business survival strategy is going to be the speed at which you handle the speed of change. That speed of change is trend.”

The only prevention to loss of market share is to keep your ears to the ground for any new industrial trend, technology or innovation. You must also keep an eye on your competitor and be quick to act and adapt to any positive or negative industrial change or once again; you can diversify.


10. Inability to secure operational capital

*          Lastly, your inability to secure funds from financial institutions could lead to business failure. I really don’t know what to say on this one because raising capital is one of the most difficult tasks in business. But it is often said that “where there is a will, there is a way.” If financial institutions refuse to assist you financially, you have to turn to other sources of funds.

In conclusion, the overall cause of business failure is lack of control on the part of the entrepreneur. Never leave total control of your business to your employees even if they are professionals. Remember, professionals are only there to advise you on what to do. The final decision lies in your hand as the entrepreneur and business owner.

“Before making an important decision, get as much as you can of the best information available and review it carefully, analyze it and draw up worst case scenarios. Add up the plus or minus factors, discuss it with your team and do what your guts tell you to do.”


By:- Online Agents Team