According to recent studies in the global market, it is quite alarming to know that almost twenty percent of small businesses fail during the first two years of their operations. It is a sad and very hurtful truth about running a business that you have planned for so long to come about and worked so hard for.
A failing business causes a lot of problems in all aspects and could be a huge burden for the business owner especially if this is the business owner’s main source of income. Businesses do not really fail overnight but there are several factors that could bring about this financial catastrophe in the long run. A business owner and the business’s management team should not fail to see the warning signs once they are already coming up one after the other.
A business owner may want to watch out and avert these signs of a failing business the soonest time possible – to save face, to save all its internal and external customers, and to save the business and the investments that went with it.
1. Cash Deficits
In the normal course of business, cash deficits come about and there are several ways that a business owner can avert these deficits for as long as business operations continue, and management recognizes the need for an intervention in terms of expenditures by means of planning and adjusting the cash flow of the business. It is also possible that a new infusion of capital and possible new investors may be needed to rectify the erring cash flow of the business.
However, if cash deficits are always being addressed by infusion of new capital via loans, this could pose a huge problem for the business operations in the long run. It just means that cash is not flowing normally via its sales, thus, the need for loans to address short-term cash flow problems. Inevitably, these loans could all the more eat up and impact the minimal cash inflow of the business which could result to bigger problems such as non-payment of usual business obligations such as employees’ salaries, monthly business expenses, and the like.
A business should not come to a point where it would exhaust its remaining cash reserves and its borrowing capacity. If this happens, it is highly expected that the business will fail and will bring about problems with creditors and even its external investors.
2. Drastic Spending Cuts
Business owners are aware that there are lean months during business operations and if this happens, one logical thing to do is to cut spending on items that clearly eats up the cash reserves. It is one of the easiest ways to do when interim cash flow problems arise. This is normal and happens to almost all businesses. However, when these drastic spending cuts are placed on reducing the workforce or its staff level personnel, or even drastic marketing budget cuts which could result in the eventual loss of its market share, then this is one of the clear-cut signs that you are in the brink of having a failing business. The current pandemic had this coming to a lot of small businesses and a number of the big ones, too, that eventually, business owners had to temporarily or permanently close down and some even had to declare bankruptcy.
3. Reaching Borrowing Limits
In relation to cash deficits, businesses sometimes need to borrow money for interim cash flow problems. Of course, there are times when businesses need to resort to borrowing to address their short-term cash problems and it is not to say that businesses are not supposed to be borrowing money especially if it is just for the short term. It is when you have reached your borrowing limits that can indicate that you are having a failing business. When borrowing for the business becomes a habit and your business is just running on loans from month to month, then this is a red flag that your business is further going down the drain and would eventually leave your business in a huge financial trouble with its creditors.
4. No Salary from the Business
A business owner expects to also have a salary from the business that they have because he is still considered an employee of the company. When a business owner foregoes getting his salary to pay off employees or to allocate the salary to the payment of pending business obligations, this is often an indication of a failing business. Suffice it to say, when the business is not able to return part of the business owner’s investment or even pay him what is due him for managing the business, his is a failing business at some point. This needs to be immediately addressed and careful planning and adjustments to certain expenditures and other cash outflows should be considered in the course of business operations in order to curb losses and a possible failing business.
5. Poor or lack of high morale within the business organization
Be it a small- or large-scale business, it is very important that the company provides all the needed moral support and attention to its personnel. It is important to note and recognize the achievements of your employees and to promote the ones that deserve to be promoted for exceeding the expectations set by management on their jobs. If the business does not recognize the work and effort of its employees, it is highly likely for these employees to look for opportunities outside of their current work environment where they will be better appreciated and acknowledged. When employees leave, it affects the business’s turnover rate that could eventually cause a failing business in the long run. It is also right to say that a business should hire the right employees whose goals are aligned with the business’s mission and vision so they could work together to achieve the targeted goals of the business. When the right employees are there who are equipped with the right mindset, right attitude, and a concern for the business who takes care of them, these valued employees, in turn, take care of the business for you.
6. High Turnover Rate
As mentioned above, another sign of a failing business is when there is a high turnover rate of employees. When there is an increasingly alarming number of key personnel and regular employees who are leaving their jobs, whether for better opportunities or a higher pay, this could be reflective of the business being unable to fulfill their promise of career growth and development within the company. Turnovers in businesses or companies are normal. But then again, when turnover rates go way overboard, this will entail a lot of cost to the business in terms of hiring new employees to replace the ones that left and to train these new hires for the jobs left. Remember that hiring entails a huge cost in the company budget and a business owner would not want to hire like five or seven times a year just for one administrative post being left out every single time, for example. It is best that the company’s human resources department would come up with a great employment package where the employee would always feel secure and happy with their jobs. Remember that career development prospects within the business is very important, as well as good benefits and compensation, and a friendly and conducive working environment so a business owner should always consider and provide these for his employees.
7. Ineffective Communication
When a business owner is not in the loop of what is happening to the business, when there is secrecy between departments, and information is not properly channeled to everyone within the organization, these could lead to a failing business. The business owner and its stakeholders should always be in the know of what is happening within the business in all aspects – financial, management, operations, and other vital aspects of the business. It is impossible to gain the trust of investors if there is lack of communication from within the organization about the state of the business, thus, a possibility of a failing business in the long run. When there is open and effective communication among all channels, problems and concerns can be very well managed and plans may be put in place in order to address pressing issues that are vital to the business operations. It is also very important to cascade information in a timely manner so that everyone involved in the business operations will be able to properly address concerns and effectively solve the issues that are at hand to save the business from failing.
8. Inventory Concerns
A constant concern about the status of inventory is indicative of a failing business. When you are constantly out of stock of your items or your inventory is not moving, this is a concern that a business owner should address immediately. When your goods are not moving, it means that no sales are coming in and your goods are just stocked. And if you feel that you are in an all-year round of having a slow season, then something must already be wrong in the way that you are moving your goods around. The more inventory is stocked and not moving around, it could leave your business without cash making you vulnerable to losses in the long run. If you are in a service business, little to no availment of your services may also mean the same thing – there is no service income coming in. In terms of items or inventory of goods being out of stock, it could be an indication of poorly managed inventory or that your vendors are not willing to provide you with the goods you need anymore because of non-payment of your dues to them. All of these may indicate a failing business which the business owner should address immediately.
9. Late payments from customers
Every business has in place an accounts receivable schedule that should be strictly adhered to in the normal course of business operations. Establishing and enforcing this schedule regularly on every period provides the company its much-needed funding to keep the business going – from payment of monthly dues to replenishment of inventory, payment of employees’ salaries, and the like. If there is a constant delay in receiving payments from customers, this would eventually pose a problem in the cash flow of the business. There should always be an established collection system in place and that your payment terms are long enough to supply you the needed cash inflow on a regular basis. If these things are lacking, you might be presented with a failing business sooner or later.
10. Inability to pay bills on time
The business’s ability to pay its creditors, suppliers, and vendors on time is parallel to the receipt of timely payments from customers. When a business starts to be regularly late in settling its dues on time, this poses a huge problem and presents itself as a sign of a failing business. When you are unable to pay your regular financial obligations promptly, this sends out the signal that your business is unable to reach its target income for the period or the business is not liquid enough anymore to sustain business operations. Thus, this gives the immediate impression of your business having cash flow issues which is not good in the eyes of your creditors, suppliers, vendors, and even your business investors. It is important to realize that business owners should work together with the finance team to immediately rectify errors that may be present in its accounts receivables process and collection schedule as against the schedule of payments for the expenditures of the company, to avoid the eventual failing of the business. A business owner would not want to be receiving phone calls from collection agencies and even subpoenas for a court hearing due to non-payment of debts. These scenarios are indicative of a failing business and it should be dealt with right away with a sense of urgency and need to keep the business afloat.
11. Failed Marketing Plans
Marketing is very important in any business venture. Having a great and solid marketing plan ensures that your business efficiently reaches its target market and gets to gain a customer base that will keep you in business for as long as they are there. The world has become noisier and more dynamic than it has ever been so a business owner really needs to pick up on the pace to gain a place in the market. For small businesses, allocating a good percentage of the business’s budget together with hiring the right marketing people can greatly help to ensure that your business will not be a failing business in the long run. If you are on a tight budget, it is important for your marketing people to know how to allocate that budget for advertising purposes and make sure that they maximize all means possible with their budget to help the business pick up. There are several ways now to minimize marketing costs but still it is workable to gain as much reach as possible to your target market. When the business is not marketed right, that is, the business does not reach its intended target market nor does it gain popularity and attention from the marketplace, then it could contribute to a failing business.
12. Poor Customer Service
Given that your business is marketed right, you have a good working cash flow, employees who are satisfied with what they are having with the business, it is still very important for a business to make sure that their customers are being served right. Even if you have all that it takes to keep your business going but if your customers complain left and right, there is still a very big chance that you could end up with a failing business. Addressing customer complaints may be difficult at most times but the business owner should see this as a great opportunity to look at where the business needs to improve and to rectify errors that were made in certain processes along the way that resulted to the complaints. The business needs to take care of their customers, just as they are taking care of their people from inside running the business.
The above are the most common signs of a failing business and there are still others to look at. It is essential that the business owner and its management team should be able to identify the above red flags the moment they present themselves to the business operations in order to save the business from failing and to keep it thriving especially at this time of a pandemic. There are many ways by which a failing business can be saved once the problems have been identified. Contingency plans should be in place, strategic planning of remediation plans should be handy, timely intervention on even the most minute problems that may arise, and immediate remediation should be done and be worked on hand-in-hand with all the people involved so that the business may stay afloat and to keep you from having a failing business altogether.
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