Many businesses fail due to finance related reasons. Financial reasons can cause for both small businesses and large corporates to fail. South Africa has one of the highest failure rates of new SME’s in the world. A study done by SEDA (The Small Enterprise Development Agency) in 2017 indicated that 75% of SME’s in South Africa fail. What are the 8 financial reasons why businesses fail?
- Poor financial management
Many business owners are so busy driving sales targets, marketing campaigns and getting new clients that finances is often neglected. The truth is a business can exceed all their sales targets, have amazing marketing campaigns and a growing client base but still go down because of poor financial management. Finances is a very important building block of any business. Business owners should spend sufficient time implementing proper financial management processes and controls regardless how small or big the business is.
- Lack of financial knowledge
Plenty of business owners are brilliant at what they do but they don’t necessarily have financial knowledge. While the business is still very small they can get away with it to a certain extent, but the bigger the business grows, the more crucial it becomes that the business owner takes control of the business finances. Even if the finance function is outsourced or people are appointed to take care of the finances, the owner should still know and understand the numbers. Financial knowledge definitely helps to make more effective and informed financial decisions.
- Insufficient cash flow
Insufficient cash flow is a huge contributor why many small and large businesses fail. Quite often the difference between turnover, profit and cash flow is not properly understood and measured. Yes businesses can experience an increase in turnover and make big profits, but still have cash flow problems. Cash flow is a key performance indicator that any business owner should monitor on a continuous basis.
- Insufficient capital
A lack of capital is problematic as it restricts businesses from expanding and reaching their full potential. Marketing and advertising are important to any business but businesses often cannot afford big marketing and advertising campaigns. The same goes for acquiring big contracts that require a big initial capital outlay from the business before the income and profits will start flowing in. Businesses do complain that they find it difficult to obtain loans / funding from banks and funding providers. Other options like raising funds through investors might sometimes be the easier route to explore.
- Lack of information to make proper business decisions
Financial information is sometimes not available or timeously available for the decision makers to use in their decision making. This also relates to the lack of knowledge reason discussed above where business owners do not always know how to use the financial information for decision making or what numbers and ratios to monitor. The timely review of management reports is a critical step in the success of any business.
- Inability to budget
Although a budget is the foundation layer of effective financial management, plenty of businesses either don’t budget or they compile a budget but don’t use it to measure their actual results against. A budget that is effectively used provides useful information for business owners to plan for the future and to identify trends.
- Failure to differentiate between personal and business expenses
Smaller businesses are often guilty of not differentiating between personal and business expenses. Apart from the fact that it becomes a nightmare for any accountant or auditor, it also results in misinterpretation. Businesses are perceived to perform well even though it might not be the true situation because of the owners’ personal intervention. It is also not possible to calculate profit margins and other financial numbers correctly if personal and business expenses are entangled.
- Not seeking professional assistance
Smaller business might not have the cash flow available to get professional financial assistance. Other business owners might feel they will manage the finances themselves or they prefer to spend the money on something else. The reality is the accounting, tax and company laws and regulations change constantly. It is hardly unlikely that business owners who are not in the financial industry will be aware of all the latest updates and new legislation. Do your business a favor by seeking professional assistance. If you cannot yet afford a financial person on a full-time or part-time basis, get a financial consultant on an ad-hoc basis to assist with big decisions and to help with the implementation of financial processes and controls as well as reporting tools.
Written by: Ronel Jooste