Business failure can be caused by your business debtors failing to pay your invoices on time, or even at all. If debtors are poor payers (although they eventually do pay off the debt) it will leave you with cash flow problems, but the biggest threat is when debtors cannot afford to pay you back at all and consequently become insolvent. If this was your best customer, or if they accounted for the majority of the money owed to you, then this is a serious threat.

Although when a customer becomes insolvent you may eventually receive the money (through the customer going bankrupt or being liquidated) owed to you.

This money may be needed at present to pay off your short term creditors and as a result, you may be threatened with bankruptcy. When a customers assets are liquidated, to pay outstanding creditors, they are paid in priority (with tax and employee wages being one of the first priorities). Quite often, you may never even be paid back the money you are owed.

This is because the assets of the business cannot stretch far enough down the priority list to pay you (if you are considered a low priority). Banks and the larger lending sources take a debenture (security) as a condition of receiving funding: this gives them first call on available assets such as fixed assets (sale of buildings/cars), stock, cash at bank, and the insolvent company's book debts (debtors who owe them money).

It is therefore important that when you have customers on credit, you obtain a credit report or a bank reference. It is further important that you recognize any early warning signs that customers are poor credit payers.

Business failure is often achieved by overtrading: selling more than you are capable of dealing with (with respect to your finance and resources). The prospect of a sudden increase in growth by most business owners will give them enthusiasm to do whatever it takes to achieve this. The most common outcome of doing so is the business becoming insolvent, hence business failure. The morale is that fast growth is not always good growth: however, steady growth is good.

Insolvency by overtrading is usually caused because your business will have to borrow more money to compensate for the increased costs (extra staff, materials, etc) of meeting the increased demand. If customers then buy from you on credit, it will almost guarantee your business becoming insolvent. Then again, there would be no problem to meet demand increases if your customers are paying in cash, as you would have the money at hand to pay for the extra costs incurred. Two of the ways to avoid overtrading is to budget for enough time between receipt of their order and payment received in your bank (known as lead time). And try to arrange a source of funding, say, a bank overdraft facility that you can use as and when you need it.

Development

Many small businesses suffer from business failure during the initial years of starting up but for those that go through this period successfully, the threat is still far from over. There are three main stages of business development:

Each stage needs a different approach and so it is important that you change your business plan at each stage: many businesses fail because they move onto the next stage too early and consequently any actions they make all contribute to business failure. You should also update your business plan regularly throughout each stage to compensate for any issues that may threaten the rate of development and success in your business.

Each stage also has three areas of concern:

Your business should acknowledge the above in each stage of development: by not doing so, problems may occur that could result in business failure.

Marketing Issues

Arguably, marketing is not considered as important to small businesses as it is with the larger companies and perhaps rightly so due to the constraints of finance. Even so, marketing should be implemented to a degree that is necessary for the product or service and should never be overlooked. Business owners often avoid marketing because they feel they do not have sufficient time: consequently, their product/service fails where a few weeks of marketing would have had an opposite effect.

Further, many small businesses fail because they have little knowledge in the area of marketing and as a result, find it challenging to implement into their business. Another reason why business owners overlook marketing is that they feel it is costly, but this is only true if the marketing campaign is not effective: a lot of funding is often put into the wrong marketing and consequently businesses spend thousands of pounds for no or little return.

It is important you have the right attitude towards marketing, as business owners often make the mistake of believing it is all about gaining new customers: it is also about keeping existing customers and continuously increasing profits.

Visit our article on Guaranteeing Your Sales Growth for an effective marketing approach.

Business owners also overlook marketing methods that proof to be extremely effective by solely adopting the more common method of advertising (which can be the most expensive). By doing so, they fail to take advantage of methods such as mail shots, referral systems, and pricing strategies.

At the end of the day, marketing is based upon good management, testing and measuring your product or service. By failing to consider this, and all that said above, you would find it very hard to escape business failure.