Why Do Small Business Fail?
By Kumar B Trivedi Published: 12/27/2008
More than 50% of all small business fail within the first three years. There are many factors that come into play when a business is started that will determine if it will prosper or fail. Here are a few issues that will cause any business to be unsuccessful:
1) Poor Management
The main reason why many small businesses fail is because there is a lack of business experience especially in the realm of accounting, finance, human resource management and marketing.
2) Inadequate Starting Capital
A business needs sufficient working capital so as to operate smoothly. Not having enough working capital will limit you financially and cause you to set off on a weak foundation that could be detrimental to the success of the business.
3) Location
The location of business is also another important factor that cannot be ignored. A business should generally be in a congested area in view of traffic and in a very accessible place. You must also take into consideration where your customers are. For example, you certainly wouldn’t open a surfing shop in the middle of a dessert.
4) Lack of Inventory Management
Poor inventory management harms young business because there is an excess investment merchandise that may not yield profit. Instead of investing in the core fundamentals of the business such as increasing sales, productivity, and location, all the funds go out to merchandise that may not get sold. Also, this takes up valuable working capital that could be used for other purposes.
5) Incompetent Business Plan
A sound business plan is essential for success. Your business plan should take into consideration all of the financial needs, what kind of market you will be dealing with, as well as any competition you may face. You need to have a product or service that is in demand and good management to allow things to run smoothly. It should be prepared or at least reviewed by a CPA.
6) Uncollectible Accounts Receivable
Uncollectible accounts from customers also harms the business and could also cause it to run into financial trouble. A thorough credit investigation of each client should be carried out before granting any customer substantial credit. This would give an insight into the customers financial state and history and a better decision will be made whether or not to sell any merchandise on account.
7) Not Retaining a Qualified CPA as a permanent Advisor
A CPA can assist in the aspects of the business, particularly with respect to generating a business plan, preparing financial statements, and providing valuable tax and other operational assistance. Click here for more information.
8) Aggressive Expansion
Aggressive Expansion can lead to disastrous consequences. An expansion is generally a good business goal, however, if not planed it can consume substantial resources or working capital in the business. This will lead to insufficient funds for the normal operation of the business, and will ultimately lead to business failure.
9) Lack of Financial Capital
Not keeping check on the dispersements of the funds and lacking internal control will also make the business run into trouble.