Cause of Business Failures

1. High Debt Ratio

The 1irst cause o1 business 1ailures you must watch out Ior is high debt ratio. I1 your business
is being owed much, maybe by giving too much credit to customers, then your business is at
risk. Also, i1 your business is heavily indebted, then it`s at risk o1 1olding up. An antidote to
this is Ior you as an entrepreneur to always carry out an acid test ratio and keep a keen eye on
the debt to equity ratio.
2. High level o1 mismanagement
The second cause oI business Iailures is high level oI mismanagement. II your key sta11 lacks
pro1essionalism, then your business is in trouble. Since your staII are in charge oI running the
day to day aIIairs oI your business, their pro1essionalism should not be compromised 1or
anything.
3. Unexpected resignation o1 sta11
The third to watch out Ior is the unexpected resignation o1 sta11 1rom sensitive o11ices. This
can really pose a threat to your business so you must be prepared 1or it. In business,
poaching is really a 1actor to deal with. Big companies are always poaching good sta11s
away Irom other companies by enticing them with improved salaries and incentives.
4. Inadequate Inventory
Another Iactor that leads to business Iailures is inadequate stock or inventory. I don't need to
explain much on this. II you have inadequate stock either Ior production or Ior your customers,
your business is bound Ior Iailure. Also; iI you stock too much inventory, you are still bound to
Iail because you are tying down business capital.
5. Selling products below cost price
The 1i1th cause o1 business 1ailures is the sales o1 goods and services below cost price.
Sometimes in business, cash crunch, 1ierce competition or economic 1actor make businesses
sell their goods below cost price and this can ruin your business.
6. Dwindling working capital
Dwindling working capital also cause o1 business 1ailures and you must watch out Ior.
Depreciating capital may be as a result oI unnecessary expenditure, too much inventory and
weak cash Ilow management on the part oI the entrepreneur.
7. Consistent negative cash 1low
The seventh 1actor that could lead to business 1ailure is consistent negative cash 1low. Cash
Ilow is to business what blood is to humans. No business can survive without strong cash 1low
management. A solution to negative cash Ilow is to hire a pro1essional accountant to keep a
keen eye on the cash 1low.
8. Declining Pro1it
Declining Pro1it, i1 not handled properly can cause o1 business 1ailure. II there is a down turn
in proIit margins due to competition or de1lation, your business could be negatively aIIected. A
solution to declining pro1it is to increase your sales volume so you can make more proIit on
volume or better still; diversiIy.
9. Loss o1 market share
Loss o1 market share is the ninth cause o1 business 1ailures. II you observe you are losing
your market share due to either competition, new technology, innovation or trend, then this
is a sign that your business is on the verge o1 been liquidated.
10. Inability to secure operational capital
Lastly, your inability to secure 1unds 1rom 1inancial institutions could lead to business
1ailure. I really don't know what to say on this one but it is oIten said that "where there is a will,
there is a way." I1 1inancial institutions re1use to assist you 1inancially, you have to turn to
other sources oI Iunds.
O Lack oI experience
O InsuIIicient capital (money)
O !oor location
O !oor inventory management
O ver-investment in Iixed assets
O !oor credit arrangements
O !ersonal use oI business Iunds
O &nexpected growth