The internal causes of business failure

THE CAUSES OF BUSINESS FAILURE

Introduction  

Usually, Businesses aim to make profit. However, a number of factors can cause the business to fail in its objective to make profit and grow. 

The causes of business failure can be divided into Internal and External. Internal causes are those causes that happen within the business itself. One thing that differentiate internal causes from the external ones is that internal causes are predictable and to a large extent the organization has control over them. The external causes are those that occur outside the business. Usually, the company has little or no control over. 

INTERNAL CAUSES OF BUSINESS FAILURE 

Poor Management 

This is perhaps the most common cause of business failure. Poor management refers to a situation where the manager or managers are not able to see the current problems affecting the business and solving them quickly enough. Management is not only expected to identify and solve current problems but also to be able to foresee problems that might happen in the future and take steps to completely nullify their impact on the business or at least to minimize their effect on the business. When managers lack important business management skills such ability to plan, record and report the business' money issues accurately, market the company's product effectively and manage his relation with customers properly, the business may suffer failures. 

Poor Accounting Practices 

Before a manager will be able to make decisions about the business, he or she needs to know exactly how much money is available to the business. In other words, the manager must have a good knowledge of the financial situation of the business before making any decision. However, where the business is operating a poor bookkeeping practices, it becomes very difficult for the manager to know what to do in any situation. Poor accounting practice can also cause regulatory bodies to either over tax or impose penalties on the business. It must also be noted that poor accounting practice or poor financial record keeping can also make it difficult for the manager to see the problems that the business in facing. 

Poor Cash Flow Management

Cash Flow Management helps a company to estimate how much cash the business will have on hand at any given moment. It makes it possible for the managers of the company to know whether there will be a shortage in cash available to the business at one point and at what time that shortage could occur. When the cash flow of business is not managed properly, there may be a fall in cash on hand. This could affect the business in many ways: The company may not be able to pay for goods it has bought from its suppliers, or pay for loans it may have taken from the bank; paying the salary of its workers could become a problem …and so on. In short when cash flow is not well managed the business could experience a lack of working capital which may cause the business to fail. 

Inappropriate balance in the Sources of Finance

When a business over relies on loans to finance its operations, it can put a lot of pressure on the amount of cash that the business is able to mobilize. This is because taking huge loans to do business means that the cash which flows into the coffers of the company must be used to pay the loans and the interest on it, leaving very little to invest back into the business or run the business. 

When the risk capital (moneys invested by people who are interested in the business and want to invest in it), is also not enough, the business may suffer similar fate as in the case of taking too much loan. For a business to succeed, it requires that the manager must be able to find a good balance between how much risk capital or loan capital he/she uses in the business. When these two capital sources are not managed properly the business can become insolvent and fail. 

Over-trading or growing too quickly too soon

When a company grows too quickly there is the tendency that the company may be taking more commitments than it can comfortably cope with. This opens the bossiness up to huge risk of not being able to keep up with its overhead costs. This could gradually result in bankruptcy and business failure. 

Poor Marketing and Research

Another main cause of business failure is the absence or lack of good marketing research to help the business understand its customers’ desires and expectation and to find ways of meeting them. Marketing research helps the business to also know the size of the market and the other companies that are competing in that market. It will also tell the manger whether the market has changed or not. In the absence of good marketing research, the business could be producing goods that may no more be desired by customers.

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