Five Reasons Why Businesses Fail

The SBA statistics state that fifty percent of small businesses fail within the first five years.  I am going to show you five reasons why small businesses stop growing and what you can do about it.  As an accountant, I have seen businesses come and go over the past 14 years. These are five of the top reasons why businesses fail. Pay close attention.

The first reason why businesses stop growing is due to the lack of sales. A poor sales system will put a company out of business faster than anything else. If your business isn’t growing it’s dying.  Therefore, it is critical to establish and develop a sales system that is sustainable.  One way to do that is to partner with associations. An association has a great deal of influence as the central hub for their industry.  By advertising on an association’s website, you will build credibility and affinity and have an unofficial endorsement that is sanctioned by the association.  This type of advertising is more targeted.

An owner cannot have a successful business if they do not have a successful sales model.  Using a software system to track lead generation, like SalesForce or a Microsoft CRM system can be a very useful tool. How you generate those leads is a major part of the ball game. Networking business lists, tradeshow and exhibitor lists, and online subscriber lists are just a few ways to fill your pipeline. The relationship should be handled professionally.

There are many ways to market and advertise without spending a lot of money. How often is your name getting in front of your customers? That is the big question. A business needs to get in front of a customer at least five to seven times before they will purchase.  This can be done by sending out at least 10 weekly mailers, utilizing social media methods, blogging on a monthly basis, and using targeted email campaigns, etc.

Poor cash flow is the second reason why businesses stop growing.  A business owner cannot have a successful business if they do not know how to manage cash flow.  Cash flow is the inflow of money and the outflow of money.

If the business owner is bringing in plenty of sales while continuing to spend more than what they receive on unnecessary purchases, they will continue to struggle. Furthermore, if a business is always late on their bills causing additional interest charges and overdraft bank fees, the business owner is not managing cash flow efficiently.

An accountant can look at what cash flow is coming in and then evaluate what bills are due and when to send them out so that the cash flow can continue to grow.  I have seen companies that are very successful with sales that end up closing their doors later due to the miss management of cash flow.  Positive cash flow is extremely important to the growth and expansion of any company.

Good cash flow management will help companies avoid having to borrow excessive amounts of debt and prepare the company for future expansion and bigger planned expenses.  A successful business will always utilize a savvy accountant that knows how to manage cash flow with an expert eye.

The third reason why a business may stop growing is due to poor pricing structures.  It is very import to consider the cost associated with each product or the cost that goes into each service as it relates to the cost per unit.  For example, what is the cost per menu item for a restaurant or the cost per procedure for a dentist or a doctor? If you don’t know these numbers, a business may be losing money on each sale and find themselves in a situation of having to borrow more and more money until they eventually close their doors.

It would be better for the business to find out what their costs are for each product, including overhead costs, so they can make sure they are making the profit they want on all products and/or services.  This is why companies utilize management accountants, so that they can assist in this process to create a product or service that is profitable for the client or customer.

Customer service is the fourth reason why a business usually stops growing.  Businesses that make commitments to their clients or customers and then fail to follow through will loose customers quickly.  Customers want to be treated with high regard and they appreciate all the effort that businesses take to make sure the customer experience is positive and pleasing.

Customer service is absolutely crucial to the continued success and growth of any business. Successful companies spend thousands of dollars training their staff on how to handle customer service situations appropriately.

Creating a positive atmosphere is critical for both employees and the end user or customer. Be careful in choosing your employees.  Look for employees that are positive and create a positive energy in the room. Do all you can to promote a positive atmosphere for both your customers and staff.

Poor management is the fifth reason why businesses often fail.  A manager who ignores any of these five areas will fail eventually. To manage a business profitably, pay attention to your business, especially the continual growth of all sales and marketing efforts, daily production including employee performance and customer service, and cash flow management, collections, and overall management accounting procedures.

Running a business can be very rewarding as long as each area of business is being met to assist in the growth and success of the business.  Take a look at what areas are weak in your business and work on strengthening them to grow exponentially.

Written by

Shannon Beck is the Founder and CEO of Professional Accounting Solutions, Inc. Shannon is a Profit Expert, a CFO, Controller, and a Certified Professional Bookkeeper. Shannon has nearly 20 years of Business Management experience and 13 years of Accounting experience. He is an accountant, trainer, public speaker, and specializes in CFO Solutions, Bookkeeping, Payroll, Management Accounting, Cost Accounting, Cash Flow Management, and in overall financial performance for small businesses. He also enjoys the outdoors.