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Why new businesses fail and remedies to prevent cash flow problems


It has been reported that eight out of ten new businesses will fail in the first 18 months.

Here are examples of why so many new businesses may fail and what action can be taken to stay in business:-

The business was started for the wrong reasons

Was the business started purely because the owner thought that they could make a lot of money? Maybe the owner thought that by being their own boss, they wouldn’t have to answer to anyone else. Or maybe, that they would have lots of spare time to spend on their hobbies and interests? These are not good reasons of why you should start your own business.

Insufficient start up funds and working capital

The reason for many failed businesses is lack of operating funds. Quite often business owners underestimate how much money is required to start and maintain their business. It is imperative to draw up a business plan in order to establish how much money the business will require, this should include the start up costs and also the costs of staying in business. It is important to take into consideration that many businesses will not make a profit until at least the second year of trading.

Lack of planning

The key to organising a successful event is down to careful and strategic planning and hard work. The same principles should be applied when setting up a new business.

Too many business owners start their business without a plan. Before starting a business, take time to develop a business plan. The plan will identify what a business owner wants their business to accomplish and the strategy that needs to be utilised to get there.  The plan must be realistic and based on accurate, current information and educated projections for the future. It should highlight any problem areas and solutions. Cash flow forecasts should be produced and updated on a regular basis.  

Too many small businesses fail because of fundamental shortcomings in the business planning.

Poor management

Many reports on business failures state that poor management is one of the principal reasons for failure. New business owners frequently lack relevant business and management expertise in areas such as finance, purchasing, sales, production and managing employees. It is unusual for a business owner to have all of these skills. Unless a business owner recognises their areas of weakness and seek help, their business may well be doomed.

Neglect of a business can also be its downfall. A business owner should regularly review, plan and organise all aspects of the business. By being pro active rather than reacting to events, it will usually keep a business owner ahead of the game.

Overexpansion

This is another leading cause of business failure. Overexpansion often occurs when business owners confuse success with how fast they can expand their business. The key is to slowly and steadily grow the business by establishing a solid customer base and building a good reputation in the market place. At the same time, a business owner does not want to repress growth. An indication that expansion may be needed include the inability to fill customer needs in a timely basis and employees having difficulty keeping up with production demands.

If expansion is warranted after careful review, research and analysis, a business owner should be able to identify what and who they need to add in order for their business to grow. Then with the right systems and people in place, the owner can focus on the growth of their business.

Poor financial management

A frequently repeated slogan is ‘Cash is King’ but how many new business owners follow the advice. Failure to review income and expenditure, outstanding creditors and debtors on a regular basis, may lead to a business failing.  It is important to monitor whether customers are paying on a regular basis. If customers are not paying within their agreed payment terms then don’t ignore it in the hope that the funds will eventually come in. Cash flow is fundamental to running a business so if customers are not paying then payment needs to be pursued. If the business is viable but is facing cash flow problems, there are options available to deal with these issues.

At Cashsolv we offer a range of business finance solutions which could assist when a business is facing cash flow problems.

Sandie Williams By Google+ |
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