What is the Biggest Cause of Business Failure? 1

Why Businesses FailThere are many reasons businesses fail: lack of money, changes in the economy, ineffective management, employee turnover, theft, illness, or death of the owner are just a few. According to SCORE (Service Corps of Retired Executives), the main reason businesses fail is ineffective management, whether it be poor planning or not understanding all that is required to operate a successful business.

Business planning is an ongoing process that includes research, locating resources, understanding the financial statements of the business, writing a winning plan to receive funding, knowing what customers want, knowing what the competition is doing, watching industry trends, identifying key employee skills needed, hiring the right people, providing a reasonable compensation package, pricing products profitably, and continuing to revise the business plan as things change. There are often warning signs months or years prior to a business failing, but some owners are too wrapped up in day to day operations to notice them.

Here’s what to look for:

So, what should you watch for to avoid business failure? Here are some common pitfalls:

  • Keep an eye on cash flow and financial trends. Is there enough money to pay the bills on time and still have some left over for you to take home?  If not, it’s time to look for ways to increase income, reduce expenses, or find funding from investments or loans. It’s often a good idea to look into some combination of the above.
  • Get feedback from customers. Are they satisfied with the service they are receiving, or do they plan to shop somewhere else? Be specific and ask what can be done better to keep them shopping with you. Don’t forget to manage your business’s online reputation as well.
  • Is employee turnover high? If employees are leaving, ask them why, then look for ways to resolve those issues.
  • Has advertising been cut because money is getting tight? Without advertising it will be difficult to reach new customers, so look for alternative marketing strategies. Find out how customers are finding your business and focus marketing efforts in those mediums.
  • Is inventory sitting on the shelf too long? Discount it and sell it to make room for items that customers will be more interested in buying.
  • Have costs increased but prices haven’t? This leaves less profitability and room for the business to grow and prosper. It’s time to increase prices or find less costly suppliers or product alternatives to offer.

If you are concerned there might be problems developing in your business, get help from an accountant or a business consultant. Successful business owners are proactive in dealing with issues, and ignoring them does not make them go away. Don’t wait until it’s too late, take action today.

Do you have any other tips for business owners looking to avoid business failure? Share them in the comments below.


About the Author Arlene M. Soto is the Southwestern Oregon Community College Small Business Development Center Director. She came to Oregon in July 2007 from the Wyoming Small Business Development Center Network, where she managed the Region 4 office in Cheyenne for almost 13 years. Read more »

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