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Nine Factors That Lead to Business Failure

These 9 factors lead to the failure of a business. Avoiding them leads to a prosperous, long-lasting business.

In his article ‘How to fail a business without really trying' published in The Accounting Sampler, John Roznowski identifies 9 factors that will surely lead to the failure of a business. Many times, some of these factors are overlooked and despite their evident damage to the business, the businessman carries on doing business, unaware of the fact that the money he invested in the business is doomed to failure.

1)      Poor Accounting Records

A business cannot survive without a good system of accounting. In the absence of such system, the business cannot measure and evaluate its regression or progress, and neither can it borrow money from financial institutions at reasonable rates. The lack of accounting records leads to inadequate cost standards and wrong pricing in cost-plus pricing where a mark-up is added to total costs. It also leads to uninformed management and poor financial planning.

2)      Lack of Understanding and Misinterpretation of Accounting Information Provided

The problem here is not the information. Records have been kept appropriately but management is unable to decipher their message. It may be because management cannot understand the technicalities of accounting information or else because management does not even bother to read and interpret the information given. Warning signs and negative trends are missed and remedial action to rectify the situation is not taken.

3)      Lack of Internal Controls

With increased complexities in business, an internal control structure is a must as without it there would be no checks and counter-checks within the company. A good system of internal control must have a plan of organisation providing for the proper assignment of authority and responsibility to competent persons, policies and procedures taking into account all the company’s different sections and departments, a match between qualification and abilities of personnel and their responsibilities, and a basis for common understanding within the firm as to the importance of internal controls.

4)      Inefficiencies in Production

These shortfalls in production lead to delays, bottlenecks, higher production costs and lower profits. It is important to recruit employees with the desire and the initiative to correct the mess in production.

5)      Poor Sales Effort

The amount of units of production must be matched with the sales demand. It is useless building up stocks of finished goods for which there is no demand. Poor sales may result from competition, special customer tastes, product unfamiliarity and the economic situation. A business should not rely on one ‘big’ customer only as it would relax its sales effort and depend solely on that customer. If the customer leaves or decides to produce the product himself, the business has no alternative but to close down.

6)      Avoidance of Professional Help

One key mistake made by businessmen is to believe that they can cope with everything themselves without seeking any professional advice. By consulting with accountants, bankers, lawyers and insurance specialists, the businessman can avoid or reduce company deficiencies. By making use of these professionals’ help and experience, a business is maximising its earnings and conserving its capital.

7)      Carelessness regarding Liquidity

A business cannot neglect working capital while seeking to build for future growth. The cash position cannot be allowed to get out of hand and timely arrangements must be made for the payment of liabilities. Also, expenditure made by the business must be really necessary to be cleared.

8)      Inadequate Staff Training and Supervisory Sleeping Sickness

A situation may arise where the businessman attempts to do everything himself and not trust anyone else in the management of his company for fear of losing control to more competent persons. Delegating work and responsibility is an integral part of management. The stress and strain from doing everything himself has a two-fold effect: an early grave for the businessman and failure for the company.

9)      Inexistence of Insurance Cover

Prospering businesses making millions in profits may be wiped out by natural catastrophes overnight unless they are properly insured. Well-planned insurance cover caters for events which could potentially lead to the failure of the business. The risks must first be determined and evaluated, then the businessman must see which risks are insurable and how much of the risk to retain within the business. The target must be to maximise cover at the lowest possible premium (cost of insurance cover). 

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