10 Main Reasons Why Most Businesses Go Under

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One of the primary reasons why most businesses go under is because of poor money management within the business. Not having your eye on your business cash flow is like walking across a busy road full of moving cars with your eyes closed. With this in mind, here are some of the reasons why businesses end up closing their doors.

1. Not keeping an eye on expenses

Most people don’t keep an eye on expenses. Businesses need a cash income able to sustain the flow of business. It is there imperative that managers understand their monthly ins and outs as far as their incomes and expenses are concerned. Most people don’t do budgeting and consequently end up their bank accounts dry. And since businesses cannot run without cash, when borrowing money from lenders becomes challenging, operations start crippling.

Solution

Get a cloud accountancy software like XERO.com. This will allow you or any member of your team to access data anytime, anywhere from any device. If you want your business to work smarter and quicker, cloud accounting software is an astute investment. Working in the cloud will give you a better overview of your finances, and enhance joint effort within your team.

Not only does this cut costs but it also allows your staff and you as well to get financial data that is needed for a speedy decision. More than that, you get the liberty to pick the features that meet your specific needs. Take time to review the different cloud accounting vendors to ensure that the one you trust your financial and accounting data with is in compliance with the current data protection standards.

2. Lack of debt repayment plans

Sometimes we are in debt to investors, partners and the bank.  Even though we think about paying back after we have borrowed, sometimes the creditor can surprise us by suddenly asking for the money back.

Solution

To avoid being faced with such a predicament, have a payment plan in place between you and your creditors. This is effective especially when you can only afford to pay a small amount each cycle. To safeguard your business, it is advisable to pay smaller amounts over time than a lump sum in one go.

Save a little every month towards debt replenishing and if you have more than one debt, rank them in terms of urgency and repay one after the other. This will essentially speed up the debt repayment process and you will be surprised by how quickly you can repay your debt.

3. Tax Payments

Most business people do not think about taxes until the last minute.  It comes as a surprise the amount that needs to be paid back. And if you don’t have the money at hand, the future of your business can be compromised.

Photo of Tax Payment

Solution

Do a projection on the profit one year ahead. This way, you will start budgeting for the money early in advance and this way you will avoid affecting the financial health of your business. Create a separate bank account to put that money in on a monthly basis to file your returns at the end of the year.

4. Poor hiring

Labour represents one of the largest expenses in a company and over a quarter of all businesses fail due to poor hiring policies. This increases the business overhead expenses which you have to pay regardless of the sales and profits of your business. As a result, your company will never prosper if you employ the wrong individuals. This can range from employees lacking the willingness to work to those with having poor customer relation skills. Since it is not easy to get rid of or replace an employee, this creates a burden on your finances that can easily put a business topsy-turvy.

Solution

Hire slow and fire fast. Take your time and do the necessary due diligence. It’s better to hire one good person than many bad ones. Look for talent and skill that fits your performance objectives. Having consistent interview and evaluation processes can do you the world of good.

5. Lack of an ROI mindset

Return on Investment (ROI) simply measures the gain or loss generated by a business relative to the amount of money spend. It aids entrepreneurs in decision making. However, most don’t think of the return they are getting on the money they are spending. Everything must have a return double and more it’s cost

Solution

Look at the efficiency of the distinctive business investments. Always ask if it’s worth doing this or that and spending the money. Ask yourself the question, “What am I getting in return?” This will help you build a profitable business model.

6. Late invoice fees

Late payment of invoices is a danger to your company. Cash makes or breaks a business and if you don’t have the money to cater for your expenses, then your business won’t survive. Vendors won’t deliver on time and employees will be demotivated if they are paid late.

Solution

Have a plan B to get working capital (emergency funding) until you balance your cash flow. Again follow up your sales invoice to reduce the number of unpaid invoices. If it is applicable to your business, instill a “delayed payment” fee.

7. Poor sales funnel

The sales funnel is the buying process that companies lead customers through when purchasing products. Having a poor process manifests in your sales performance.

Solution

Focus on the awareness of your product/or service and the interest it generates to the customer. Today, successful businesses rely on marketing to guide the customer through the sales funnel and build customer loyalty. Maximise on product marketing, customer data analytics and the two-way communication provided by social media marketing.

Photo of Bad Sales Funnel

8. Not negotiating

It is impossible or at the very least impossible to operate a business without the proper negotiation skills. You will need to have agreements in place with employees, vendors, customers, and any stakeholders in your company.

Solution

Have an objective for your negotiations and always make prior preparations. Don’t be intimidated and pay close attention to perceptions and try to influence the person you are negotiating with in a calm and professional manner. Look to articulate your interests clearly but the same time listen to the views of the opposite party.

9. Bad financial advice

Managing cash is delicate in its own right.  Businesses are most likely to fail because of an inability to manage costs or anticipate rising costs.

Solution

First, look to ascertain whether your financial advisor has the right qualifications and experience to help you achieve your financial goals. Although not mandatory, it is best if he/she is knowledgeable in the products/or services you currently have. Secondly, improve your financial know how to guard yourself against the downturns that can happen regardless of a good advisor.

 10. Spending on the wrong thing

Most businesses overspend money on the wrong places, departments and services. For a company looking to improve its financial health and as a result gain a footing in the market, controlling costs should be on the forefront.

Solution

Put in place an appropriate cost structure. It is important to establish the difference between wants and needs. Seek to account for the primary needs of your business such as rent and employee payments. Do not factor any unearned revenue in your budgeting. If the cash flow is compromised, this can make you incur a financial deficit. Ensure any marketing you outsource is tied to your business outcomes.

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