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Business failure is commonly attributed to economic cycles or factors that are outside of a business’s control. Whilst this can be a contributing factor to business failure they are not traditionally the sole source.
Other causes often cited to lead to failure include:
- squeezed margins
- falling sales
- rising material costs
- the loss of a key customer or major supplier
These factors are typically symptomatic of a business in distress but are not necessarily the cause of failure.
In reality failure typically arises as a result of both external and internal factors, with the interaction between these factors, and how management address them, being the true underlying cause. It is management’s inability to plan, drive, act and respond that is most often the root cause of business failure.
External factors are those that are largely uncontrollable by a business, and internal factors are those that can be controlled by management.
Contributing factors to failure include:
|External factors||Internal factors|
|Market changes: Cyclical market movements, having poor markets, no market or bad market research||Inadequate management/distracted management|
|Economic factors: Interest rate changes, exchange rate movements||Failure to respond to change|
|Government policy||Insufficient marketing effort|
|Technological changes||Inadequate accounting information and controls|
|Industrial unrest||Failure to plan|
|Natural disasters or environmental issues||High gearing and undercapitalisation|
|Litigation||Reliance on a single customer or supplier|
|Loss of essential licences||Big project syndrome|
Internal defects, largely driven by management, create an environment within the business for critical errors to be made, and can lead to failure following changes and pressures arising from external factors. Common warning signs of businesses in distress should act as a red flag to management, and can include:
|Poor or ineffective management (autocratic rule, lack of depth, incompetence)||Discussions that the "Big Project" will save the day|
|Weak board of Directors or executive invisibility (absence from business)||Loss of key personnel and declining morale|
|Absence of or weak reporting (unreconciled accounts, no timely reporting)||Physical deterioration of premises|
|No planning or budgets||Too many toys - extravagant corporate assets and lifestyles|
|Poor or declining results||Failure to manage working capital (debtors and stock)|
|Increases in trade creditors||Stock run down|
|Payment of round sums to creditors or change to COD terms||Deterioration of quality and service|
|Withheld cheques and payments||Failures among related businesses, competitors, customers or suppliers|
|Increase in overdraft facilities, or change in banking facilities||Realisation of assets outside the ordinary course|
|Deferral of statutory payments (taxation, super, etc)||Frequent meetings with banks/financiers|
The following four strategies could help you to prevent the failure of your business:
- Employ a strong management team who understand both the business’ market and its operations.
- Regular financial reporting and performance monitoring. This will act as a gauge to both internal and external changes and how they impact on your business.
- Seek expert advice and external opinions. Someone external to the business will often view things in a different light than those internally. Also recognise that you cannot be an expert in every field, getting expert opinions can stem an issue quickly and generally saves more than it costs.
- Time is of the essence. Acting quickly to identify and address concerns often results in more change options and strategies being available.
The above factors centre on the early identification of negative changes affecting the business (either externally or internally), and to timely implementation of action to counteract that change. This is fundamental to preventing failure and also in ensuring your business continues to perform.
Whatever the reasons for the failure of an enterprise one thing will be certain, the causes of failure are likely to have been building for some time. If they can be detected early enough, a collapse may be averted.
Our Recovery and Reorganisation specialists are experts in recognising the warning signs of distressed businesses and can assist in the formulation and implementation of reorganisation and exit strategies.
Michelle Gorrie | Senior Manager - Financial Advisory
T (direct) +61 7 3222 0321 | E firstname.lastname@example.org