The idea of being your own boss is quite appealing. You spend countless hours brainstorming, researching, and developing your brand so that you can finally find that coveted for independence of running your own business.

However, all the work, money, and time you put into starting and growing your business can quickly go south if you fail to keep up with some fundamental activities that will ensure that the business continues to thrive and be of a going concern.

I have put together a list of the common reasons why businesses fail, and what you can do to manage these common pitfalls.

Reason #1 – Failure to manage and plan for Cash flow

Perhaps the biggest reason businesses fail is from failing to manage cash flow. While a business can be profitable on paper, if it does not have cash to handle the day to day operations such as making payroll, buying inventory and supplies to produce goods for sale, paying rent and utilities, paying suppliers, paying taxes…etc., it is not going to be able to continue to operate. Managing cash flow is a very important task and is a key component of a successful business. Reviewing your cash flow position and planning for future cash inflows and outflows should be done on a regular basis. Understanding your business and market very well will help you to forecast for your cash flow needs. If your business is seasonal, you will have times when you have more cash coming in, and other times when you have more cash going out than in, so you need to make sure that you are planning for these fluctuations.

What you can do:

You need to understand your business through and through, not just the internal operations, but also external factors beyond your control that will impact your business or industry.

  • External factors – include government regulations such as minimum wage increases; carbon tax; municipal licensing requirements; infrastructure development – for example the subway extension may result in road closures or other problems that impacts customers ability to get to you. You should stay up to date with government regulations and if they have an impact to your business, make sure you build into your cash flow plan the expected impact.
  • Internal factors – you should include in your cash plan a contingency for emergency repairs and maintenance. When equipment breaks down, you want to be ready to get it repaired as soon as possible to avoid further interruption to the business. You should carry insurance for your business to manage liability issues that can result in cash payments that you would normally not have planned for.
  • Manage receivables – do not be too generous with payment terms. Have customers pay right away or have no more than 30-day payment terms. You can include terms such as early payment discounts or have a policy to charge interest if invoice is not paid by a certain date. Know your customers, follow up on outstanding invoices in a timely manner, and make it easy for them to pay you by accepting different methods of payment.
  • Manage payables – negotiate long payment terms with suppliers where possible. You will want to keep cash in your business for as long as possible. I am sure you can see now that by reducing accounts receivables time, and extending the accounts payables time, you can keep cash in your business for a longer period, and that will help you keep going.
  • Foreign currency risk – If you have suppliers or customers in other countries, foreign currency fluctuations may impact you. Think about hedging foreign currency to manage the foreign exchange risk.
  • Know your overhead – you should know what fixed expenses you have and how you are going to pay for these each month, whether you have money coming in or not. Fixed expenses include rent, utilities, insurance, leasing costs

Reason #2 – Failing to plan

A business that operates without planning is like someone walking into a minefield wearing a blindfold. You need to plan for what you want to achieve for your business. Your business plan will help you to understand how much you can manage with your capacity; how much you need to break even (i.e. the minimum you can sell in order to cover your fixed costs and break even); what your labour needs are based on planned operating capacity and to meet customer demands; what happens if you do not get as many customers as you thought you would; what is the lowest you can go to continue your business.

Most businesses do a business plan to request for financing, but unfortunately, they stop at that. The planning process should be an ongoing activity. As you know, not everything will go according to plan, so it is important to continuously evaluate and make updates based on what has changed. You should also pay attention to the external factors mentioned above and plan for them so that nothing comes as a surprise.

What you can do:
  • Prepare a business plan
  • Prepare a budget each year, and do monthly or quarterly forecasts to see how you are doing against budget and adjust your plan accordingly

Reason # 3 – Failing to understand the market demand

You need to understand what your customers and market want, and you also need to be able to deliver. Understanding your customers and the market means that you can anticipate changes and are flexible enough to meet those changing customer needs. The reason you are in business is because you have found a need in the market that you can fulfill. Even if you are the first player in the market, it will not be long before competitors are established and take a share of your space. To maintain your competitive advantage, you need to be in tune with your customers. Get to them first. Know what they need, and how you can meet those customer needs.

What you can do:
  • Do market research and study your competitors
  • Market your business. Make sure that customers know what you offer and why they should come to you.

Reason #4 – Ignoring the administrative stuff

Let’s face it, everybody hates doing paperwork. It is not fun paying taxes, doing bookkeeping, and keeping up with all the government regulations and compliance requirements. As a business owner, your focus is likely on managing and growing your business, and there’s not enough time in the day, or enough of you to also handle the administrative stuff. Many businesses have found themselves in trouble by just ignoring the paperwork. If your books are not in order and you are failing to keep up with tax filings and other reporting requirements, you could be facing significant interest and penalties that will surely put a dent in your cash flow. Taxes and other compliance requirements will not go away. They will eventually catch up and can force businesses to close.

What you can do:
  • Hire an operations manager or office manager to manage the day to day operations or the administrative work
  • Get a bookkeeper to keep your books in order on eithera daily, weekly or monthly basis
  • Hire an accountant to handle your taxes and check in on things on a regular basis so that you are not missing any important compliance requirements and filing deadlines

Reason #5 – Burnout

Most small businesses start as an owner-operator model. That means the business owner is doing all the work, from finding customers, meeting with clients, doing the actual work, managing the books and administration. This is too much for an individual. While it may be necessary in the beginning to keep costs low, if you are getting to a point where you are not able to handle the workload and you can no longer meet your customer needs, it is time to either outsource, or hire someone to help you. The last thing you want are unhappy customers and a loss of credibility to your brand. Burnout can also cause you to lose motivation and dedication to your business.

What you can do:
  • Hire employees or assistants to help you
  • Outsource the work to third parties
  • Find a business partner

Reason #6 – Putting all your eggs in one basket

Who doesn’t love that major contract! Securing a major contract can be the catalyst you needed to get your business established in the industry. However, relying on that one contract can put your business at risk. Losing that one customer can mean the end of your business too. Before you start spending big dollars on hiring people, getting new offices, buying material for the big job – make sure you will get paid. You can have the client pay an advance to start the work, or you can have provisions in the contract for the client to make progress or milestone payments. The last thing you want is to spend a lot of money and put a lot of work into the job, and then find that the client cannot, or will not pay you, or they have decided to terminate the agreement.

What you can do:
  • Diversify your client portfolio. Do not depend on the one customer. Use the opportunity to get more clients or provide other services so that if the one client fails, you still have others that can help you continue your business operations.
  • Request for an advance deposit and Progress billings
  • Have a lawyer review the contract before you sign off

Reason #7 – Failing to have a succession plan

Yes, you started the business, and yes, you are the only one who can make it work. Your customers will not talk to anyone but you. But what happens if you fall sick and you cannot go in to work? What if there is an emergency in your family? You need to have a backup plan in place. There needs to be someone else who will be able to take over if you are temporarily unavailable.

Succession planning is not only for the business owner. You should also make sure that if you have employees, you are cross-training and developing your employees so that if a key position is suddenly left vacant, you have someone who is ready to step in to ensure key work goes ahead without major interruption. You do not want to let your customers down because you are not there or your key employees are not there. It is easy to lose favour with your customers, and it is just as easy to develop a bad reputation from failing to meet your customers’ needs in a timely manner. This can have a negative impact to your business and fast track it to fail.

What you can do:
  • Cross train and develop employees so that they can step into the critical roles
  • Partner with other professionals in your industry so that they can cover for you while you are unavailable
  • Put a succession plan in place

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