Thursday, 27 December 2012

5 Reasons Why Businesses Go Bust

Thursday 19 November, 2009
Just about every international business expert and every business consultant involved in business development and business growth, will have gained valuable experience of how businesses go bust.
Here are the 5 reasons why businesses go bust. These are not your typical bank or accountancy statistical reasons. They have been gleaned from years of hard slog, working at the coal face with business experts, business owners and directors.

Number 1: No Managing Director Training

Many managing directors have received no formal academic business training in how to run a business or how to manage business development or business growth. Many a business expert would agree this is clearly one of the most clear cut explanations for why so many businesses fail in the first twelve months of trading.
Running businesses and employing staff is one of the only activities that can be legitimately conducted without the managing director or business owner having any qualifications in how to actually run their business.
Think about this, if you ride in a taxi then the taxi driver has to be licensed. Book a security guard, and they have to pass a security training programme and be licensed. However if you want to run your own business and employ an unlimited number of salaried staff, then you just pay a fee to form your own company and you are up and running.
A number of new business owners do make it beyond the difficult first 12 months of trading, however the failure rate continues at an alarming rate for the first 3 years of trading.
One of the most difficult issues facing new business owners, is that when they started their new business it was likely fuelled by endless amounts of passion and enthusiasm. Although these two issues are very powerful motivators, they do have a battery life. Experts in business agree that after a few months most new business owners find themselves struggling to cope with the stressful demands of running their business, because they don’t have the training skills to manage the business effectively.

Number 2: Indecisiveness

Indecisiveness has a very detrimental effect on any business, none more so than a business in trouble. For untrained business directors, indecisiveness can manifest in various guises. Sometimes directors will hesitate over a decision made by a middle manager or partner and then begin to micro manage everyone and everything in their business.
Another manifestation can be missing a realistic business growth opportunity because the Managing Director (MD) is unable to make a decision after receiving sound expert business advice. In this case the inability to make a basic business decision can not only halt business growth but it can also lead to the death of the business.
Every business consultant knows that indecisiveness is a clear sign of ineffective leadership. If the MD is leading a workforce and shows signs of being indecisive, then the workforce will lose confidence in their leader. Morale will quickly drain away. Once this happens employee work ethic spirals downward and it is very difficult, and often impossible to regain workforce confidence. Business development and business growth stops, and in this short time frame businesses go bust, especially family run businesses. Sibling rivalry and parent - children chain of command are the biggest factors in these types of business failures.

Number 3: The Financial Tipping Point

One of the greatest problems facing any business still trading after 2 to 3 years is what’s referred to in business development parlance as ‘The Financial Tipping Point’. This means that a business has been trading but the annual turnover and profit has levelled off at the same turnover as the previous year’s trading.
A business can hit the tipping point at any level of financial turnover. Untrained business owners often mistakenly dismiss this crucial red flag by attributing it to a year in which their turnover still achieved the same as the previous years. In reality every individual business consultant knows that the following red flags should be addressed with an immediate sense of urgency.
If your business turnover's the same amount as last year with the same profit margin, then your business is not growing. In fact you are actually losing money compared to the previous year. This is because inflation will have generally increased, as well as the cost of doing business. Rent, electricity, gas, rates, postage, staff salaries and contributions will all have increased.
Ignoring the financial tipping point invariable leads to poor cash flow management and everyone knows this is a leading cause of businesses going bust. When every business hits the financial tipping point, two things and only two things can happen. First your business levels off and second your business folds. Unless a decisive business owner takes a proactive course of action the business will go bust in a heartbeat.

Number 4: Directors Ostrich Syndrome

The director’s ostrich syndrome usually materialises when an untrained business owner hits a business growth or business development problem which they have no idea how to manage. A frequent course of action for many MDs is to imitate an ostrich and bury their head in the sand hoping the problem will go away.
Every business consultant knows that the best time to address a business growth problem is when it is flagged as a perceived future development problem. This is typically during the initial strategic growth planning stage. Every business has problems and every business owner has to tackle these problems head on or the business will suffer.
The directors ostrich syndrome can have a very detrimental effect on your business growth and many businesses have been forced into voluntary or forced liquidation because untrained business owners bury their heads in the sand and the problem grows to such an extent that there is no way of saving the business.

Number 5: Refusing Outsourced Support

“If you were drowning in a swimming pool and you knew there were people close by who had life saving skills and life saving equipment, would you scream out for help and support?” Nearly everybody would. However, business owners whose business are in trouble will rarely seek out a proven business consultant to provide outsourced support.
Most small to medium size business owners operate without the financial backing and support of a larger company’s board of directors. They therefore feel isolated and alone in their world of business activities. One of the most critical tactics to implement when your business is struggling it to engage a proven business growth specialist.
In an ideal world it is better to find this business consultant or group of business development specialists at the outset of your business because they will be aware of future business problems which you may be unaware of. Identifying these problems and/or issues at an early stage is far better. Think of it like preventative medicine.

Author Credits

Dr. Mark D. Yates is The International Business Guru & Growth Consultant and grows businesses fast, delivering exponential growth, increased turnover & profit margins. He delivers business support to small, medium & large businesses in 42 countries. To claim his FREE business case files visit his web site at or e-mail him at

No comments:

Post a Comment