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In the current recessionary climate, many businesses are failing. Committed to high costs they face falling revenues. Cutting back only makes matters worse. With fewer staff service levels drop and customers vote with their feet. The business moves from profit to loss and is forced to close.

New businesses fail in large numbers because of cash flow. Many new businesses are started with viable ideas and good products. To the outsider it may seem that the business is thriving. The founder is onto something good. But a few months down the line the business has shut its doors. Cash flow is the biggest killer of new businesses and can even impact negatively on larger more established firms.

Using some entrepreneurial initiative, many start their own businesses. With finance from the bank and a sound business plan in place the business is ready to go.

But it is not all plain sailing. Expenses must be met now. Getting paid is a different story. Suppliers often insist on upfront payments for goods and services especially when the business is new and does not have a track record. Then there are the staff that were hired to do the work. They have to be paid at the end of each month or week.

Many customers - especially the large retail outlets - pay their suppliers anything from 30 days to 120 days later. In spite of the fact that the new business is running at a profit the delay between expenditure and income is just too long and the business is forced to shut its doors. Although there is money in the pipeline, there are no funds to pay the staff.

Timing and location are important considerations.

A few years ago a developer bought up a small shopping centre in a Johannesburg suburb. They had a vision of an architectural masterpiece comprising upmarket apartments above a thriving shopping centre.

The building was completed as the recession began to bite. The apartments proved to be too expensive for the area. Many of the shops are vacant and the two restaurants spend most of their time awaiting customers. The community have classed the centre as a "white elephant".

The area is predominantly middle class. The apartments were launched onto the market at high prices long after the residential property market boom was over.

Reasons for the centre's failure include a misreading of the location. Perhaps the concept would have stood a better chance in a more upmarket area? With the property market in decline and retail business under pressure, the timing turned out to be a disaster.

Building began during a seemingly endless property boom.

There are already many popular and busy shopping centres in the area.

A third consideration in this case is price. Hoping to start realising a return on investment, the developers out priced both the residential apartments and the commercial rentals. As the months pass and the centre remains quiet, the shop and restaurant space becomes less marketable. A catch 22 situation has developed. The centre will not attract customers until there are many more shops and restaurants to attract them. Retailers and restaurateurs will not take up the space until there are customers.

Mismanagement and misadventure also cause failure. Recent events have demonstrated the potentially devastating effect of poor investments. Driven by greed, many major international businesses invested heavily in what appeared to be a lucrative investment. But an investment must have underlying value, without which it will pop.

Reasons for business failure are many. Cash flow is often at the core, but there are many other causes.

Learn more about this author, Barry Marcus.
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