by Siew Cheng Hoe

Created on: June 21, 2009

Businesses fail for many reasons[1]. The most important reason is the cash flow problem.

A new business fails because the entrepreneur over-estimates the projected sales, and under-estimates the operating cost. The entrepreneur fails to prepare for the worst, and too optimistic about the sales.

A business takes time to build up. If the entrepreneur predicts six months to break even, and the business needs two years to break even, the entrepreneur has to find cash to support the business for another eighteen months. If the entrepreneur is unable to raise the money to save the business, then the business dies. The business fails because of cash flow problem. The business runs out of cash.

A business does not fail because there is no sale. A business fails because there is sale but the customer does not pay for the service. Every business owner learns this the hard way. Sales do not make money for the company. A business makes money only when all the customers pay on time and pay in full. When a customer declares bankruptcy, the business may not get a single cent back.

A business fails when the entrepreneur makes the wrong decision. An entrepreneur will not know everything about business. If he knows about sales, he may lack in legal aspects or financial aspects. He has to seek the best legal support and financial advice.

When the entrepreneur signs the legal document without the help of his lawyer, he is putting his business on the chopping board. A small clause on page xxx of the thick document can kill the business. An entrepreneur should seek the help of legal professionals, accounting professionals, and bankers if he wants his business to flourish.

Sometimes a business fails because of over expansion. A business can only carry so much debt. Once the debt increases and spirals out of control, the business fails. Many retail chains fall into this trap. Opening one outlet after another may attracts the attention of the newspaper, but this makes the banker worry. The banker does not like to see a new business taking so much debt, and upsets the balance sheet.

Expansion is not always good. When the entrepreneur expands the business too fast, he strains the business resources beyond the maximum capacity. Every employee will feel the stress, and feel that they cannot cope anymore. The customers will get bad service. The entrepreneur has to solve production problems, and pacify customers. Everyone is unhappy. Once the business takes on too big an order, and fails to fulfill the order, the business fails.

Business fails for many reasons. The primary reason is cash flow problem. A business with deep pocket will survive any recession.

[1] http://www.sba.gov/idc/groups/public/documents/co_de nver/co_starting_new_business.pdf

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