4 Common Reasons Why Businesses Fail

4 Common Reasons Why Businesses Fail

43,335 – this is the number of businesses that have shuttered in 2020 alone in Singapore. It may seem that the Covid-19 pandemic has taken a toll on a great number of businesses, many of which were caught unprepared to deal with such an unprecedented global event, but this number is actually about 9% or 4,083 less than the 47,418 businesses that closed down in 2019, when the economy was in full swing, before the pandemic even started. So, more businesses folded during ‘normal times’, and if not for the injection of government stimulus to support companies to stay open and keep jobs in 2020, the number of business closures would probably be far higher. The stimulus had plausibly cushioned the impact from the pandemic and decelerated business failure rate; however, this could mean that more businesses may potentially close when government support slows down.  

So why do most businesses fail?  

1. Slow to Digitalise

If there’s anything that the pandemic has taught us, it is about being agile and embracing digitalisation. The businesses that survive are the ones that have adopted digitalisation into some parts of their operations that allow them to pivot and transform swiftly when necessary. The ones that don’t, unfortunately shutter as traditional ways of running a business are no longer viable. For example, the retailers that operate solely via physical stores – how many of them have been caught unprepared and lost a chunk of their revenue during lockdowns?   

Building successful businesses on traditional core competencies such as sales, marketing and finance are fast becoming obsolete in the face of the 4th Industrial Revolution (4IR). 4IR is the unfolding age of digitalisation that changes the way we live, work and relate to one another. Business owners must realise the significance to act now and adopt technologies that power 4IR if they want to succeed in the digital era. They should address the needs to be agile and put in place leadership and talent that are capable of keeping pace and working with digital technologies that advance their goals, create new experiences and thereby increase value for their customers and stakeholders.  

2. Poor Business Planning

Start-ups and small business owners often overlook the importance of sound business planning before they start operations. Having a business plan allows business owners to examine the needs of the company in a methodical and objective manner that identifies business opportunities, growth strategies, and technical and financial needs for the company. Business owners should understand their industry and competition well, establish a viable business and pricing model with the right infrastructure to support operational requirements as well as realistically project revenue streams before anything else.  

A well-laid-out business plan will enable the company to prepare and navigate through challenges during its course of operations. However, relying on the same initial plan all the way is not going to suffice. Ventures that survive, they stay relevant with the times and adapt their plan to the changes surrounding them – changes such as climate change, or global pandemics, or new technologies such as the 4IR mentioned to name a few. 

3. Incompetent Management

How many businesses fail because of the lack of competency or business acumen within the management team or business owner, especially start-ups? Hiring for start-ups is notoriously challenging, and sometimes, business owners have to settle for what they can afford instead of finding the right fit for the role. In some instances, especially in the first one or two years of operations, business owners may also take on multiple roles, doing work outside of their core competencies. The management team is therefore led by the business owner, who may not necessarily have the right skill set to manage the operations/employees and the time to so effectively. The lack of a qualified, dedicated management team could potentially jeopardise performance and result in mismanagement or poor decision-making for the business. To avoid falling into this pit hole, prioritise hiring a competent and strong management team made up of people who are a good fit for the company and who can perform tasks that are important for the business. Additionally, outsource activities that they are not well-versed in or have little time to work on so that time and effort can be more effectively optimised and managed.  

 4. Ineffective Cash Management

Naiise goes into liquidation, founder to file for bankruptcy– it was an unfortunate outcome for founder Dennis Tay of home-grown retailer Naiise who borrowed heavily from banks for years to try to keep his business afloat, an outcome that could easily happen to any business owner who lacks financial prudence and cash management.  

One of the misconceptions business owners have is that generating revenue is the same as making profit. Revenue is money that is incoming, while profit is the money left after paying the business expenses. The business may for example make $100,000 in revenue but only $1,000 in profit – is that enough to sustain the operations in the long run? To increase profit, business owners should review and maximise profit from high margin products or services and minimise costs from non-revenue generating expenses. However, to be financially effective, profitability alone is not enough. Being cash flow positive is equally, if not more, crucial because cash is the lifeline of any business. Imagine if the money that is coming in, goes out as quickly? Being short on cash is not only a very stressful and unpleasant place to be in, but it will also prevent the business from meeting its financial obligations and the business could fold. This is one of the reasons why the small business failure rate is 82% 

In summary, cash management is vital for businesses and implementing a cash management system that monitors your cash inflow (revenue, investor funding, etc) and outflow (capital expenditure, cost of goods etc) will solidify your cash position and enable growth. 

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