by Costas Chryanthou

Created on: July 13, 2008

Blaming economic conditions and changing consumer trends maybe the main way of thinking in business failure, though a business owner may look at his own day to day decision making and poor long term vision as the real reason behind failure in business.

First of all it is important to identify a number of reasons from within the company that are attributable towards a failing business. Sure the cash is the main driver in any business, and without sufficient net cash flows the business will be raising finance from external sources. This in the end will bleed the companies resources dry. It is fair to state that this position is achieved by paying out more money than it has coming in on a regular basis. Therefore by having too many payments and creditors to suppliers for goods and raw materials will partially result in cash being drained. The company needs to generate sales and receive the cash for the turnover as fast as possible. Offering customers credit terms maybe a way of generating new sales. Though it may certainly lead to a policy that leaves the company short of cash.

Also not having a well defined marketing policy. The customers are not clearly identified, and therefore this creates marketing confusion amongst potential buyers. The demand ultimately might not be sufficient to sustain a new business or one that is attempting to enter the growth stages of its lifecycle. Offering customers heavy discounted goods in attempt to generate too many sales, too quickly also will result in spending money on raw materials and finished goods, whilst the company attempts to grow too quickly.

Supposing a company produces goods in-house, the production management needs to be looked at carefully. Questions need to be asked and answered sooner rather than later. The company should look at key management accounting number ratios such as the minimum quantity ordering process, minimum and maximum cash holding levels as well as the stock levels. Company resources should be managed in a way to ensure that there are sufficient stocks to meet the required demand for the goods. In a way the expectations of the business leaders, may at some stage be considered as too unrealistic, by investing in the production of too much quantities of goods. Alternatively the business might be losing out on customer numbers by simply not having the goods on the shelves or in the factory to distribute.

From a Human Resource perspective, having incompetent managers, lazy and poorly trained staff is just unnacceptable in terms of operating any business whether it be a newly or already established business.

More importantly the key financial ratios need to be looked at an early stage. Too high gearing which is a measure of the companies debt/equity ratio is the main reason for failure. The higher the level of gearing the higher the business risk and ultimately the more money that is paid out in interest on long term debt.

Activity ratios such as the current asset or quick ratio is another way that can be taken into account the measure of a business use of working capital. Should the quick ratio be too high then the company will therefore not be using its cash effectively. This will be an indication that the company is holding too much stocks and perhaps cash. If the ratio was say too low then this would mean that the company has perhaps too many creditors to pay, and also the current liabilities exceeding the current assets.

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