Why do businesses fail and can anything be done to avoid it?


According to ASIC’s 2017 and 2018 reports on corporate insolvencies the following were listed as the top 3 reasons for company failure:

  1. Inadequate cash flow or high cash use
  2. Poor strategic management of business
  3. Trading losses

In 2016 the first two were the same as well, with poor financial control combined with lack of records overtaking trading losses as the third reason.

Not all businesses are run through a company, but it is not unreasonable to extend these reasons to why businesses in general can fail.

Of course there may be underlying causes that eventually lead to one of the three reasons mentioned above, but ultimately the business is likely to sink if it runs out of cash or it’s not making money or it’s not planning for the future.

You don’t need to do anything complex to help your business stay afloat in stormy waters or, as they arise, sail the winds of success. Simply practice some business finance fundamentals on a regular basis. I’ve emphasized the word regular because regularity is as important as the fundamentals themselves.

As Jim Rohn put it,

“Success is neither magical nor mysterious. Success is the natural consequence of consistently applying basic fundamentals.

There are no new fundamentals. You’ve got to be a little suspicious of someone who says, “I’ve got a new fundamental.” That’s like someone inviting you to tour a factory where they are manufacturing antiques.

Some things you have to do every day. Eating seven apples on Saturday night instead of one a day just isn’t going to get the job done.

Success is nothing more than a few simple disciplines, practiced every day; while failure is simply a few errors in judgment, repeated every day.”

Whether you’re in the food or craft beer industry, fitness, real estate, construction, aged care or something else entirely. Whether you’re just starting out, have been in business for a while or you’re looking to pass the baton to the next generation. Whether your business goal is to make a fortune or make a difference.

If you practice some business finance fundamentals you are set up to succeed, or if you’ve done all you could, but dark clouds are gathering on the horizon (into each life some rain must fall, as the poet said) then you’re at least likely to see them coming and asses if you can sail in a safer direction sooner rather than later – apologies if all my nautical metaphors have made anyone grammatically queasy.

So what are the business finance fundamentals, you ask?

Planning your business

Planning your business is important because it helps you clarify or remind you why you are in business (what management speak would call your “vision”), it helps you examine what your business looks like now, where you want it to be and how you will get there (your “strategy” in management speak). Planning is also important for considering and building back up plans for influences outside your and your business’ control, such as industry changes, government policy changes, consumer trends, or even, depending on your business, the weather and seasons.

Budgeting and record keeping

Keeping track of your business finances is difficult if your budgeting and record keeping are not maintained. Budgeting helps you set your expectations for income and expenses for the months ahead. Good record keeping gives you information and reports that rely on, as well as actuals to compare to your budget to see how you’re performing against expectations. Together they can help you make more informed decisions, to see what’s working and what needs attention.

Funding your business

Your business needs funding to operate. Funding can help you get your business going when you’re starting up, support your day to day operational needs, and helps to grow or expand your business in the future. Funding can come in different forms such as debt, equity and grants. It is important to be aware of when your business might need funding and if/where it can access it.

Managing your cash flow

The “cash” in cash flow is not too hard to understand, but not everyone quite grasps the “flow” – that is: the cash moving in and out of your business at different times. Like fuel for an engine, without cash flowing through it, your business won’t run. The challenge is to avoid running out of money by managing the flow of your cash.

Planning your regular financial commitments

It’s important to know your payment cycles and dates, which can vary from business to business. Understanding and scheduling financial commitments can help you anticipate, prepare (put some money aside) and pay the correct amount when it’s due. It is wise to plan for future payments, particularly for large upcoming payments like a tax bill.

Tracking your business’ performance

You need to compare how your business is going against how you have planned for it to go. Have you set yourself monthly, quarterly and yearly goals and are you meeting them? Tracking is pointless if you are not tracking the right things. You only need to track a handful of factors, but what they are will depend on the business you’re in and the stage of your business’ lifecycle. Likewise, there is no point in tracking the right factors unless you review the results regularly, learn from them, make adjustments if needed and adapt.

Some of you might now be thinking, “Knowing why the above fundamentals are important is as useful as a sieve in a leaking boat. Give me something I can action right now.” Unfortunately, my space here, and no doubt your time now, is limited to explore them in enough detail. Therefore, to better understand these fundamental success factors and what actions you can take around them, we will expand on them through a series of future posts.

Until then, you can take some immediate action by answering the four questions below. In fact, if you do nothing but ask and answer these on a regular basis you would have a better understanding of how your business is going than most business owners.

  1. Is my business trading profitably?
  2. Have I put enough aside to meet my business’ regular financial commitments?
  3. Does my business have enough to pay me and pay others?
  4. Is my business improving or falling behind?

How confident are you of your answers? Is it a gut feeling or can you show something to support them?

The information contained herein is of a general nature only and is not intended to be relied upon nor is it a substitute for appropriate professional advice. Whilst all care has been taken in the preparation of the material, it is not guaranteed to be accurate. Individual circumstances are different and as such require specific examination. Asparq cannot accept liability for any loss or damage of any kind arising out of the use of or reliance upon all or any part of this material. Additional information may be made available upon request.

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