Why do businesses fail?

What are some of the biggest risks that businesses face? Why do so many businesses fall short of mitigating these risks?

Understanding the types of risks your business may face will help you develop effective strategies for dealing with them. These are just a few of the most common types of business risks for startups in both the UK and the US:Legal Risks

Running out of money

Poor Management

No business plan

Bad marketing strategy

Not understanding the legal risks 

Too many startups go into business without understanding which legal services they might need.

Business lawyers and corporate lawyers can help you set up your company correctly and lay out the groundwork for smooth operations.

When it comes to getting funding, you may need to tap into a number of sources, including banks, angel investors or venture capitalists. A business lawyer can help you make sure that your startup is structured in the best way to get funding.

Business advisors who understand your industry can also help you minimize risk, avoid legal pitfalls and thrive. For example, they can help you create an employment agreement that works for both you and your employee.

Accountants are another resource that every business needs at some point. They are your partner in helping your business stay profitable by providing financial advice on taxes, marketing strategies and more.

You should also consult with HR professionals who can provide tools for managing employees, including legally binding employment agreements, employee handbooks and other policies, as well as workers' compensation insurance information.

Source: https://writersblocklive.com/blog/business-failure-statistics/

Running out of money

When there is a disconnect between revenue and cash flow, the business will always suffer. There are plenty of stories about businesses that have come close to failing because they simply ran out of money.

In a small business it's easy to be so wrapped up in day-to-day operations that you don't see what's going on around you, including your cash flow. 

It's important to know what your expenses are, but it's even more important to know how much money you have coming in, and when you can expect that money to be deposited into your bank account.

It is vital for a company to have a “working capital cushion”. 

This cushion can be used to pay bills when an unexpected loss of revenue occurs, such as a major client's default on a contract or a product whose sales volume does not meet expectations. In the absence of a sufficient working capital cushion, even a small shortfall in revenue may cause your company to fail.

Working capital is one of several financial resources that small business owners need to ensure the sustainability of their companies. 

Others include:

Cash reserves – this includes cash on hand at the business and any cash held in current accounts at banks or other institutions

Short-term investments – this includes any investments with maturities under one year, such as certificates of deposit, commercial paper and money market funds

Accounts receivable – this is the amount owed to you by customers who have purchased products or services from your business but have not paid yet

Inventory – this is the amount of products you have on hand that have been purchased from suppliers but have not yet been sold

Fixed assets – this is the value of property owned by your business and used in its operations, such as buildings and machinery

Poor Management and leadership strategy

The majority of businesses, especially small businesses, fail for reasons that could have been avoided. 

When we look at the leading reasons why small businesses fail, the main reason is due to a lack of business acumen.

Another reason small businesses fail is due to a poor understanding of the market they are serving. 

Most new businesses enter markets with competitors already established. Without a clear understanding of those existing competitors and how their products or services differ from those you offer, leads to failure.

A third reason why small businesses fail is because their owners and/or managers don't know how to manage finances and maintain cash flow. The majority of new businesses don't last at least two years and this statistic does not seem to change no matter how well we educate or train potential entrepreneurs.

Another common reason why small businesses fail is because the owners did not properly plan for their exit strategy . They did not plan on how they would sell their company or what price they would sell it at.

A fifth reason why small businesses fail is because of poor leadership, management skills or weak organizational structures . It seems that most people who start their own companies are good at what they do but are not necessarily good at running a business. This is particularly true for smaller organizations where the owner is the only

No business plan (or a vague one)

Business owners who fail to address the needs of the business through a well-laid-out plan before operations begin, are setting up their companies for serious challenges. 

Similarly, a business that does not regularly review an initial business plan—or one that is not prepared to adapt to changes in the market or industry—meets potentially insurmountable obstacles throughout the course of its lifetime.

The importance of planning cannot be overstated. The vision and mission statements, long-range goals and strategies, and operational details must be clearly defined so that they can be followed even when unexpected circumstances arise.

Bad marketing strategy

Before starting a new endeavor, it is important to research the potential financial risks involved. 

Before investing capital in a company, especially an early-stage business, it is crucial for companies to consider the risk of failure that is associated with their investment. 

This is especially true when considering situations where the company has limited financial resources and cannot afford to sustain losses associated with marketing campaigns, which are often necessary for generating public interest in product offerings.

Many new entrepreneurs are not prepared for the marketing needs of their businesses in terms of capital required, prospect reach or accurate conversion-ratio projections. These factors can lead to inadequate funding and other unforeseen consequences that could jeopardize the success of the venture.

A good marketing strategy means understanding your audience, potential market share, business objectives and then the resources and channels needed to achieve those objectives.

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