Synopsis
It’s too easy to say businesses fail because they don’t generate sufficient sales or run out of cash. Before this happens, some combination of the 31 leading causes of business failure will leave a business with insufficient available cash to operate the business. You avoid financial ruin from these leading causes of business failure by learning which management actions are vital to earning higher profits with less stress.
Why Small Businesses Fail: Beyond Low Sales and Cash Flow
The driving reason why small businesses fail is that their owners don’t understand how to play the game of business to win. They fail to learn what the core elements of the game of business are because they don’t take the time to learn how every dollar of profit earned is like a point scored n a game reflecting either luck or the excellence of their business management.
Business owners who achieve financial freedom through business ownership become such because they know, with certainty, the next smart move to make in their business to generate higher sales and profits. They know how to use their financial statements to play their business game smarter today than they did yesterday. Consider the following list of the five most common business problem areas and their associated cause of business failure:
- No Cash Reserves
Cause for Business Failure |
Associated Problem Statement |
1.1 Inadequate Cash Reserves | I’m always anxious about running out of cash. |
1.2 Inconsistent Cash Flow | I’m getting eaten up by late fees when paying my bills. |
1.3 Insufficient Cash Flow | I hate lying awake at night worrying about covering payroll. |
1.4 No Cash Management Process | I am tired of dealing with aggressive collection calls. |
No business owner can assume that positive cash flow and profitability will automatically happen for any business. Cash reserves are achieved through thoughtful profit planning and follow-through on key actions supported by accurate and timely reporting.
- No Plan for Profits
Cause for Business Failure |
Associated Problem Statement |
2.1 Insufficient Gross Profit | All my money goes to paying employees and suppliers. |
2.2 No Financial Management | My business never has sufficient cash reserves. |
2.3 No Operating Budget | My business earns less profit than it should. |
2.4 Too Much Debt | I have fallen behind in my debt repayments. |
2.5 Over-Invested in Fixed Assets | My sales and profits are declining while costs increase. |
You either have a plan for earning profits or you don’t. Without a plan to direct and control your business, “How will you know if you’re earning enough to be worthy of your valuable time and investment?” Never lose sight of the hard truth that business profitability in past years is no guarantee of profitability this year or next. Without a profit plan, your decision quality is always at risk, because it isn’t framed in by what success and failure look like.
- No Performance Measures
Cause for Business Failure |
Associated Problem Statement |
3.1 Losses are Getting Higher | I made less money this year than last while working harder. |
3.2 Increasing Unexpected Expenses | I’m spending more and more on unforeseen expenses. |
3.3 No Management Forecasting | I never know if I will make money or not each month. |
3.4 Management is Overwhelmed | I’m in constant firefighting mode on reoccurring problems. |
3.5 Weak Financial Statement Use | I don’t know what to look for in my financial statements. |
3.6 Uncertainty About the Future | I used to think I knew what I was doing, but now I’m unsure. |
The failure to use metrics, measures, standards, and indicators is a 100% guaranteed waste of money. A few basic calculations can help you convert wasted money into cash reserves in the bank. For example, calculating your Gross Margin from your P&L Statement is a straightforward calculation that immediately tells you whether operations are making or losing you money.
- No Management Discipline
Cause for Business Failure |
Associated Problem Statement |
4.1 Higher Sales, Lower Profits | I don’t know why my profits are lower while sales are higher. |
4.2 Never Enough in Savings | My business shows a profit, but I have no money in the bank. |
4.3 Overhead is Too High | My overhead costs are growing faster than my business. |
4.4 Never Enough Time | I am working more hours while making less money. |
4.5 Employees Don’t Get It | Too many costly mistakes keep happening in my business. |
4.6 Poor Accounting Practices | My financial transactions are always recorded late. |
The hard reality is that managing a profitable business with substantial cash reserves requires discipline to do difficult things when they need to be done, even when you don’t want to do them. When management fails to practice personal discipline in doing what they know needs to be done because they don’t want to do it, that puts their business cash flow and profits at risk. When management doesn’t know what needs to be done to make more money, that too requires discipline to discover what they need to learn to do differently, so they achieve better results.
- No Personal Accountability for Results
Cause for Business Failure |
Associated Problem Statement |
5.1 Business Ownership Stress | I feel more stressed now than when I started my business |
5.2 Too Much Owner Dependence | Too much employee direction robs me of time to think. |
5.3 No Business Control | My business and life are out of control |
5.4 Owner Burnout | I hate going to work and can’t wait to leave each day |
5.5 Ownership Fatigue | I’m miserable and nobody wants to be around me |
Failing to be accountable for results means you are failing to produce the planned outcome meant to improve sales, profits, or cash flow. Failure to improve any of these three standing business results is either the consequence of an action or a sequence of actions not generating the expected result, or it’s a failure to complete an action, so no result gets created. Either way, you are likely to make less money.
Looking beyond the signs of a failing business.
Never lose sight of the following truth in obtaining financial freedom through small business ownership:
The real lost income of any business is not the actual money lost but the difference between the money made and the money that should have been made but wasn’t.
No business will be successful if there isn’t enough cash available to operate the business. Always protect your business by protecting your cash—the lifeblood of any business—first through forecasting weekly cash inflows and outflows. Second, by stopping unnecessary cash outflows that drain cash reserves and contribute to profit leakage.
You must follow through on these actions month-to-month to achieve your annual business goals and objectives. As you prioritize and eliminate unnecessary activity through disciplined follow-through, you will experience better results and work fewer hours.
How at risk is your business to failing?
If you struggle to hold onto cash or have shrinking profits, take the free BusinessCPR™ Business Assessment to see what is and isn’t working in your business. Click here to take this no-obligation profit diagnostic exam. Upon completing the assessment, you will receive a risk profile showing how at risk your business will suffer cash flow and profit problems, the leading cause of business failure over the next three years.
How at risk is your business of failing?
Protect your business from failing by taking the free BusinessCPR™ Business Assessment to see what is and isn't working. Click the link below to take this no-obligation profit diagnostic exam. Upon completing the assessment, you will receive a risk profile showing how at risk your business is to suffering cash flow and profit problems, the leading cause of business failure.
TAKE THE TEST