The number one reason
for business failure is mismanagement.
Business management mistakes are easy to make, but difficult and
sometimes expensive to correct.
High interest rates, business down cycles, or new technology are
challenges that can be overcome. Bad judgment and lack of management
skills and experience are fatal.
The business mismanagement shows up in
such ways as
Inadequate
or wasteful use of capital (cash)
Even if sales of your
business is growing, the challenge remains to manage cash flow.
The undercapitalized business who faces the common pattern of
inventory growing, suppliers not extending credit, customers who
pay slowly, and owners borrowing the maximum funds will soon die
a painful death.
Inadequate
business records
Many bankrupt businesses have been found
to have poor records and, as a result, ended up making poor
decisions. For example, these businesses would bid too low on
contracts because they did not know how much it actually cost
them to produce their products. A lack of business records
resulted in their inability to conduct proper cost analysis.
Insufficient knowledge about that type of business in legal,
financial, marketing, accounting, or purchasing matters
Running a successful business requires expertise in
many areas. Very few owners are well qualified in all areas, so
you must build a successful team in those areas where you lack
expertise: lawyer, accountant, marketing expert, etc.
Starting
a business for which there is not an adequate market
This
can be offering a product or service that you like but that no
one else wants to buy. Or, offering a product or service that
people want, but not enough people exist. For example, if an
amusement park needs a population of 30,000 to support it,
it’s not likely one will survive in a community of 10,000.
Poor
pricing of your product
Most new business owners have big
problems understanding the relationship of every cost item to
revenue. For instance, if the goal is to realize a pre-tax
profit of 10 percent, then a $10,000 cost item requires gross
revenue of $100,000.
Poor planning
The
adage applies here, “If you fail to plan, you are planning to
fail.” Many businesses have never written a business
plan or even thought through all the aspects of a business plan.
Failure
to conduct market research and failure to take competition
seriously
In one national study, 50 percent of bankrupt
businesses lacked information about their customers, what they
liked, or why they went to the competition. For example,
Americans certainly like pizza, but will a new pizza franchise
survive with four other national chains and a local pizza
restaurant in the same town? Probably not, even if you and are a
nice guy that means well?
Ignorance
or non-compliance with regulations Government rules, tax
laws, and regulations can literally bring your business to a
halt if you fail to see their implications in time. Most
problems caused by regulations are easily avoidable, so get good
advice about regulations that impact or may impact your business
or cash flow.
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