10 reasons why businesses self-destruct

Posted on 15 Jun, 2012

Over 4,300 companies went into liquidation in England and Wales during the first quarter of 2012, according to figures from The Insolvency Service. That’s 4% more than the same time last year.

Firms go out of business in good times as well as in bad. While the tough economy is pushing some over the brink, there are other factors that can, if they get out of control, take what seems to be a healthy company over the edge.

1. Poor cash flow. This is the top company killer, and sadly, it’s often self-inflicted. If your bank account is continually running on almost empty and every payday means juggling cash, one day it’ll probably catch up with you. What’s worse, however, is that your lack of cash is preventing growth and real success.

2. Weak processes and organisation. This can be the crack which undermines a fast-growing business. The sales are coming in but not enough time has been invested in setting up flexible, reliable procedures. As a result, customer service levels drop, major mistakes are made and the company fails.

3. Inability to change. This is where older businesses can run into a wall, because they fail to accept changing market conditions. If your customers don’t buy from you in the way they once did, no amount of complaining will save the business. What’s needed is a new approach.

4. Loss of key staff. Small firms can become too reliant on one or two skilled team members. They might be a sales star or a skilled professional in their trade. Once this is recognised, the firm which doesn’t take action to reduce this risk is asking for trouble.

5. Absence of common vision. Small firms with strong leaders can be literally ripped apart when they disagree over the way forward. If those in charge do not share a common view of the future, a fork in the commercial road is inevitable and tough choices will need to be made.

6. No real market. Many start-ups are programmed to self-destruct from day one, because they are driven by a ‘good idea’ for which there is no real market. It might be due to location, poor timing, or simply that not enough people are interested in the product.

7. Death of a co-owner/director. It’s not uncommon for the death of a major stakeholder or director to spell the end of a small business, even when on paper it seems unnecessary. If there has been no succession planning, those inheriting the shares could insist on taking a controlling role, bringing the potential of confrontation and serious disagreement in management.

8. Weak marketing. Cutting the marketing budget because sales are falling is usually counter-productive. But it’s all too common for firms worried about profits to rein in on promotional activities. History has shown that successful firms increase marketing in recession to secure a bigger share of the market.

9. A disaster occurs. Fire, flood or major theft can put otherwise healthy firms out of business. In many cases, the firm could have survived had it planned ahead and had some contingencies in place.

10. Nepotism. Some small businesses fail because they employ key staff based on their relationship with the owner, not their skill. Even if the issue is recognised and resolved, and the company saved, it’s still taken a step backwards.