Why Do Businesses Fail?

It is a sad fact that every day in the UK,starts to stretch and juggle its cash. The bank
businesses fail.manager wants security and personal guarantees
In fact to be more accurate, in a normal year onas the account starts to be constantly up against
average around 50 companies go into liquidationthe overdraft limit, and the business starts to
on every business day of the year. During adelay sending in management accounts; the
recession such as in 1992 that figure went up tobusiness starts to stretch payments to suppliers
over 90. And that's just the companies. It doesn'tand subcontractors or make round sum
include the sole traders and partnerships that gopayments on account as a way of eking out the
under as well.available cash. The staff know that the business
So why do businesses fail?has problems and morale and quality of work
Business failures are a bit like fires. Somethingsinks.
smouldering may be difficult to see but can beBy the time it is in a crisis the finance director has
relatively easy to put out with little damage oreither jumped ship or has gone off on long term
risk if caught early. Once a fire is really going, it issick leave. It is on stop with its suppliers and the
much easier to see, but is usually much moreCCJs are starting to fly. So sub-contractors are
difficult and dangerous to extinguish as itstopping work and the business cannot get the
consumes resources, and crucially, cash.materials needed to complete its contracts or
Cash is king as the old saying has it. And no oneproducts and so collect in cash from its
believes this more deeply than turnaroundcustomers.
executives. Because fundamentally businesses failAnd if it cannot get the cash in to pay the rent
when they run out of cash.or the wages at the end of the month, suddenly
And while there are well established ways ofit's all over.
tackling businesses that are starting to burn theirWhat causes normal business failure?
cash, one of the major problems for turnaroundSo how do businesses get themselves into these
professionals is that we are often called in toosorts of situations?
late.There seem to be five main contributing factors
You would call the fire brigade if you saw ato most 'normal' business failures in varying
burning house. If you see a business that is firedegrees.
fighting, it is time to call in the business fireFirstly and usually most importantly, there are
brigade, a company doctor.management problems. The autocratic managing
What causes business failure?director whose drive has been vital in the past,
There are really four types of business failure.but is now driving the business into the ground
Firstly there is the start up that never does. It's awhile simultaneously driving away anyone who
well known statistic that most businesses ceasetries to disagree; the board dispute that has led to
trading within their first three years. In manycivil war; the lack of anyone who really
ways this is an inevitable result of the willingnessunderstands what the numbers are telling them;
of entrepreneurs to take the risk of starting upthe family company run in the interests of family
and testing the market.members and not the business's needs. Any and
Given how difficult it can be to raise money in theall of these sorts of issues can prevent the
UK for a new venture, many such businessesbusiness recognising or dealing with the problems
have so few resources to start out with that afacing it.
relatively small set back in the early years can beBecause secondly, any business needs to have an
sufficient to wipe them out, where a largereye out for the strategy challenges that it will
business would pull through. Having got throughinevitably face, whether these are changes in the
these critical first three years however, businessmarket and customers demands; technological
failures then fall into three main camps.changes that require reinvesting and moving on;
Catastrophic business failures where the businessor changes in the competition which require
suddenly 'falls off a cliff' are the second type ofimproved efficiencies to keep the cost base
failure. While often being high profile, these arecompetitive.
actually quite rare and are often due to theThe third area is a lack of financial control, where
impact of some traumatic event such as a majorit is usual to find that cash has become tied up in
fraud, lost litigation or sudden change in the law.old stock, debt or retentions; that lack of proper
The third type of failure, overtrading, by contrastreporting means costs are actually out of control
is a relatively common cause of business failure in(is all that machinery we are paying hire charges
boom times as businesses grow faster than theirfor really still on site?), management do not have
cash resources can support.accurate costings so they do not really know how
But most failures are of the fourth type andmuch margin each job is making, and there is
follow what has come to be known as theweak control of variations and valuations so the
business decline curve where a business that iseventual outcome is uncertain.
underperforming, starts to become distressed andFourthly there is a lack of operational control of
as the decline steepens, falls into crisis andboth hard issues such as up to date machinery;
eventual failure.and the soft issues of organisational structure and
How do you spot the warning signs?staff management.
One particularly frightening thing about the declineFinally there are any 'big project' such as a new
curve is how as a business descends the slipperycomputer system, a problem acquisition, a huge
slope, problems start to compound.new contract, or a premises move. Anything that
An underperforming business makes lower levelsadds extra disruption to the business, while taking
of profit than its competitors. With less profits itaway cash and management time can prove to
can reinvest less into the business. Slowly,be the straw that breaks the camel's back.
insidiously, it starts to slip behind and over timeSo if you start to recognise any of these signs,
market reputation and share are lost, resultingseek professional advice from an accredited
eventually in the first losses being recorded.turnaround professional with experience in dealing
As it has to fund losses, a business in distresswith these types of situations.