What is Business Failure?
The most common reasons for business to underperform (low productivity, low profits) or fail (bankrupt, cease being) are as follows:
Poor cash flow management.
Absence of performance monitoring.
Lack of understanding or use of performance monitoring information.
Poor debtor management. A combination of not paying your debtor on time and not coordinating payments with incoming cash flows.
Overborrowing. The company is overleveraged and debt is not being reduced.
Over reliance on a few key customers.
Poor market research leading to an inaccurate understanding of the target customers wants and needs.
Lack of financial skills and planning.
Failure to innovate.
Poor inventory management.
Poor communications throughout the organization.
Failure to recognize your own strengths and weaknesses.
Trying to go it alone. Trying to do everything yourself and not seeking external help. Whether this external help be as simple as hiring additional staff or going to professional services such as a lawyer, accountant, banker or business coach.
Younger companies are more likely to go bankrupt because of shortcomings in managerial knowledge and financial management abilities. In contrast, older firms are more likely to fail because of an inability to adapt to environmental change. These are the conclusions of a new research paper that examines factors underlying corporate bankruptcies, and compares the main causes of failure between young and old firms.
It sounds simple, but the number one reason why businesses succeed or fail is because the business owner did not take the time to conduct a feasibility analysis, market and business plan. Why? Sometimes an idea is developed that the business owner thinks is good but no one else does. Sometimes an idea is formulated that the business owner believes is so good that the potential customers will find it themselves. And sometimes the business owner thinks that everyone is a potential customer.
A clear and consistent finding of prior research is that firms face the highest failure risk when they are young and small. But if there are factors other than the liabilities of newness and smallness that contribute to firm failure, what are they and how can their influence be mitigated? From the perspective of the resource-based view of the firm, firms will fail if they are unable to generate self-sustaining levels of organizational rents. For new firms, the critical challenge then is to establish valuable resources and capabilities before initial asset endowments are depleted. Among older firms, which have survived the liabilities of newness, it is imperative to ensure that resources and capabilities continue to provide value as the competitive landscape changes. Thus, we should observe different causal mechanisms between firms that fail early and those that fail at a later stage. Young failures should be attributable to inadequate resources and capabilities (relative to initial endowments). Older failures should be attributable to a mismatch between resources and capabilities and strategic industry factors.
The main reason for failure is inexperienced management. Managers of bankrupt firms do not have the experience, knowledge, or vision to run their businesses. Even as the firm's age and management experience increases, knowledge and vision remain critical deficiencies that contribute to failure. A second key deficiency occurs in the area of financial management. Some 71% of firms fail because of poor financial planning. Three particular problems that arise in this area are an unbalanced capital structure, an inability to manage working capital, and undercapitalization. Both old and young bankrupt firms suffer this deficiency. This confirms other findings that initial problems in financial structure are difficult to overcome and continue to haunt firms as they age. This study suggests that the underlying factor contributing to financial difficulties is management failure rather than external factors associated with imperfect capital markets. Many bankrupt firms face problems in attaining financing in capital markets; but, it is the internal lack of managerial expertise in many of these firms that prevents exploration of different financing options.
In diagnosing the root causes of small firm failure it should not be surprising that this turns out to be the management inefficiency of owner-managers. In the 1930s in the US, management deficiencies were claimed to be related to a business failure by Cover (1933) who said that 'discernible errors in management' were a major cause of retail bankruptcies. Dun and Bradstreet's studies have consistently found that causes due to poor management predominate in failures (Peacock 1985c): US business failures, 92% due to management, US 17,000 business failures, 94% due to management, and Canada 2,598 business failures, 96% due to management. According to national annual reports under the Bankruptcy Act, internal factors relating to the quality of management are reported as major or contributing causes of failure at least as twice as often as factors external to the firm (Williams 1986; McMahon et. al 1993). Similarly, business consultants claimed that 90% of business failures were due to management inadequacy (48% incompetence and 42% inexperience).
Source:
http://www.moyak.com/papers/small-business-failure.html
