Managing a small business in these tough economic times is a real challenge. As it grows, problems and opportunities demand different solutions. It involves consistently keeping up with the market, planning, problem-solving, the right skills and attitudes, and change. There is no set playbook that everyone can follow, and each business has its risks and rewards.
Despite many businesses doing well, there are still unfortunate ones that don’t survive. According to reports, 20% of small businesses fail within the first year; 30% by the end of the second year; 50% by the fifth year, and 70% by the end of the decade.
A primary reason businesses fail is the lack of funding or working capital. Owners of failing companies seem to fall short of calculating the sales revenue of products and services. So, what can you do as a business owner if your business has fallen financially?
5 Common Reasons Why Businesses Fail
1. Lack of funding or working capital
Business owners generally know how much money it takes to run operations daily. This includes funding payroll, paying rent and utilities, and ensuring payment for outside vendors.
However, when you’re unaware of these expenses, it disconnects you from running your business, resulting in funding shortfalls that can instantly put the company out of operation.
2. Inadequate management
Another reason businesses fail is the lack of business insight on the part of the management team or business owner.
In some instances, only the business owner has enough experience to navigate the business, especially during the beginning years of operations.
However, while the owner may have the skills and expertise, sometimes they don’t have the characteristics of a great manager and cannot manage their employees properly.
If you don’t get a competent management team, you might mismanage certain aspects of the business, like hiring, marketing, or finances.
3. Ineffective business planning
Owners often undermine the importance of effective business planning before opening their doors. Generally, a sound business plan includes the following:
- A clear description of the business
- Present and future employee and management needs
- Capital requirements like projected cash flow and different budgets
- Marketing initiatives
- Competitor analysis
When you fail to address these needs because of the absence of a well-laid-out plan, your company is in for serious challenges. In the same sense, not reviewing your initial business plan yearly can set your company up for numerous obstacles.
4. Marketing mishaps and lack of innovation
Along with an ineffective business plan, business owners also fail to address the marketing needs of their company, such as capital required, prospect reach, and accurate conversion-ratio projections. As a business owner, you should know marketing costs for campaigns and establish realistic budgets for current and future marketing needs.
Marketing efforts need to come with innovation if you want to stand out among competitors and maintain business success. Your company should constantly need to find a better way to meet your clients’ demands than any other competitor. This is how you can establish your brand for your clients and ensure your operations will continue.
5. Insufficient understanding of the industry
When you fail to innovate, you risk your business’ success by being average in the market. Not having enough understanding about the industry you’re working in will have you falling behind competitors, bringing your business to failure.
For instance, specific industries require more innovations and have different product cycles. Your business needs to adapt to the changes in the industry and continue to innovate and improve if you want to survive.
How to Save a Business That’s Failing Financially
1. Make sure you have a positive variable contribution
When your business starts dipping, ensure that the price you get for your product or service is greater than the cost it takes to deliver an incremental unit.
For any product that brings a negative variable contribution, increase its price and reduce the cost of providing the total unit, or stop offering that product or service.
While there are exceptions to this rule, you generally want to ensure that you make money to cover your overhead sale.
2. Cut costs
Every business in jeopardy is likely to cut costs.
First and foremost, eliminate discretionary spending by halting summer outings or company parties. Assess non-people costs like rent and utilities and see if you can also lessen that.
Some unfortunate effects of cutting costs are laying off employees, reducing hours, and reducing compensation. These are never easy, but it will be the better choice if your company is dipping and have everyone lose their jobs.
3. Prioritize your payables
Keep the business floating by prioritizing any obligations that will shut your business down if they don’t get paid, such as your employees.
After that, prioritize factors that will cause significant penalties if not paid, like taxes. Lastly, put any late payments at the bottom of your list.
4. Plan your cash flow carefully
After prioritizing your payables, look at your cash and the receivables you project to collect. Lay them down in a cash flow plan that details which you will pay, when, and how much you will pay.
This forecast will also help you with possible sales and expenses. You would also want to send out invoices to follow up on customers who haven’t paid.
Aside from the cash flow plan, you can also use several tools to manage your finances to see how your funds are doing in plain sight quickly.
5. Don’t ignore and talk to your creditors
Almost all businesses have a debt to pay. Small companies that have debt have higher credit scores. Don’t let your debt overwhelm you, and try not to avoid your creditors.
Instead, talk to them about your current situation and plans to pay your debt. Most of them would be understanding and willing enough to work with you if they feel confident that you’ll eventually pay what you owe.
Keeping your struggling business afloat can be challenging, but a little focus and attention to detail can help steer the direction of your venture upward.
While there are different reasons why a business fails, if you can ensure a positive variable contribution, cut down expenses, prioritize payables, plan a cash flow, and talk to your creditors, your business might have a big chance of surviving. A minor setback can be an opportunity for a major comeback.