Why Companies Fail

Tips on how to avoid business failure!
by: Victor M. Rivera - vmr@bizplans.net

A business failure is defined as a business discontinuing operations because it can no longer pay creditors, resulting in a loss to creditor(s).  There are many more businesses that discontinue operations for a variety of reasons, such as loss of capital, inadequate profits, ill health, retirement, etc., but if creditors are paid in full, it is not counted as a failure. However, many of the businesses discontinue operations for the same reasons some fail.  They are:

1. The lack of planning results in:
    a. Inadequate sales
    b. High costs
    c. Shortage of working capital
    d. Inadequate growth
    e. Low profits

2. Poor accounting records:
    a. No monthly financial statements
    b. Inaccurate and misleading statements
    c. Lack of management reporting systems


3. Disregarding or misinterpreting financial statements

4. Receivable difficulties:
    a. Lack of company credit policy
    b. Poor credit procedures and collection efforts

5. Inventory difficulties:
    a. No inventory control
    b. Excessive inventory


6. Excessive fixed assets:

    a. Acquisition of assets not needed
    b. Under-utilization of equipment and building


7. Lack of adequate working capital:
    a. Under-capitalized
    b. Inability to understand cash flow
    c. Poor banking relations


8. Inadequate sales:
    a. Lack of public exposure
    b. Poor sales incentives
    c. Incorrect sales forecasts
    d. Improper price setting


9. Failure to reduce high costs:
    a. Does not recognize excessive cost
    b. Lacks the courage
    c. Can't distinguish the fat from the muscle
    d. Has defeatist attitude


10.Disaster (not adequately insured):
    a. Fire
    b. Flood
    c. Burglary
    d. Employees' fraud
    e. Other


11.Neglect due to:

    a. Bad habits
    b. Poor health
    c. Marital difficulties
    d. Other


12. Fraud (on the part of the owner reflected by):

    a. Misleading name
    b. False financial statements
    c. Premeditated oversell
    d. Irregular disposal of assets

13. Not seeking professional advice when necessary:
    a. Lack of confidence in professional help
    b. Lack of ability to grasp assistance received
    c. Too much ego or pride
    d. Believe professional help is unwarranted and too costly

14. Bad judgment due to:
    a. Lack of experience in the business
    b. Lack of managerial experience
    c. Unbalanced experience
    d. NO concept of the company's position in the marketplace

15. Conflict of interest:

    a. Between owners, if more than one
    b. Between management and labor
    c. Between company's needs and employee's desires
In reviewing the reasons for failure, it is easy to arrive at the conclusion that in many cases the owner wanted to fail. Although that is not the intent at the start, it is at the end.

All too often, the owner will give up too soon.  Most of the time, a business can be saved if the owner will recognize the problems and have the courage and fortitude to correct them.

vrivera@bizplans.net                                                                Tel. 787.379.5477