What are the major reasons for Businesses closing down?
A business would close down if the owner does not make enough revenue for it to continue operating. Closing a business is essentially like bankruptcy, and there are many reasons why a business may struggle to make money or even go into debt.
One of the worst things that can happen to any business owner is having their company close down. For entrepreneurs, this means risking everything they have worked for over an extended time. Business closures are never easy, and there are many reasons why it happens.
The most common reason for businesses
The most common reason for businesses closing down is simply no demand for their products or services; this is called market failure. Even though the owners of such a business might try as hard as possible, they will eventually fail because people don’t want to buy their product – think of all those bakery shops you see next to bigger supermarkets – they have been forced out of business by supermarket chains who can provide much wider ranges of products at a lower price.
Another main reason for businesses
Another main reason for businesses closing down is an owner dying, retiring, or otherwise deciding to no longer run the business. If an owner ever wants to sell their business, they have to have complete faith that someone else can successfully manage it and continue making profits. Otherwise, that could lead to them losing money rather than making it! It is all very well having a great idea for a new company, but if you cannot commit enough money or time to make it work, the business will close down again.
Another significant reason why businesses
A recession is another significant reason why businesses close down people don’t have as much disposable income, so they are not spending as much on luxuries such as haircuts, clothes shopping, etc., which makes businesses struggle. A particularly bad recession combined with other factors might lead many businesses in a particular industry to close down, as they cannot compete against larger, more established businesses.
Making enough money
A business may also close down if it is not making enough money, but the owner can see no way of turning it around and believes that things will only worsen. This is a sales and marketing issue and usually happens because they have made poor business decisions such as spending too much on advertising or buying new equipment, which is more trouble than it’s worth. In essence, this means that they don’t have enough revenue to cover their costs. The business often loses money after all their bills are paid due to lack of revenue, meaning that eventually, there will be no capital left at all!
Smaller businesses tend to struggle with market failure – big companies typically become bigger companies because they are good at managing their sales and marketing to make sure they can turn a profit. In contrast, smaller businesses don’t necessarily have the expertise or resources to do this well.
Generally, businesses close down for one of the following reasons: lack of interest, poor management, lazy owners who don’t want to make it work and can’t find a buyer to take over.
However, there are generally three main reasons why businesses fail:
Lack of Funding
Rising operational costs may be beyond your control, but you should always ensure that your company has enough capital to keep moving forward. If the lack of funding becomes overwhelming, you might need to find ways to keep afloat until you finally run out of options. Otherwise, you will be walking on a tightrope without knowing when it will snap under pressure. The best way to deal with this is by ensuring that.
Poor Financial Controls & Procedures
Not having or knowing how to use financial controls and procedures that link into your business’s mission statement will generally cause problems at some stage for your company. If you aren’t aware of what these financial control and procedures should be (and how they’ll benefit your business), contact us, and we’d be happy to assist. Check the e-commerce sector for ideas and insights.
It may seem obvious, but it’s surprising how many people don’t consider this a factor in their business. If you’re in a poor location, it doesn’t matter how good your product or service is. You will struggle to get people into your store/office/outlet and, more importantly, keep them coming back.
It’s often more than just one competitor that causes the downfall of a business. You may have one company doing much better than you, but there could be several other reasons why this is also happening.
Another consideration is if your competitors are much stronger financially than you are due to their size & market share is greater. This generally means they’ll have deeper pockets when it comes to marketing campaigns, e.g., TV ads, billboards, etc., which generally means if they’re smart, they’ll invest more than you can afford.
This doesn’t mean you should invest the whole of your marketing budget into one TV ad or billboard etc., but rather save your money and place your ads in multiple locations.
You could put some of your marketing funds towards online advertising instead, e.g., Google Ads, Facebook Ads, which would generally reach a wider audience at a cheaper rate than having just one TV ad/billboard, etc. If you need assistance deciding where is best for an individual business, contact us, and we’d be happy to help.
Owning Your Business
The next reason why businesses close down is that their owners are not passionate about what they do or don’t see themselves doing this for the next 20 or 30 years. Once you decide to sell your business, it’s generally a good idea to get an independent third-party valuation so the owner knows what they should be expecting in terms of a sale price and whether that’s in line with their expectations. If it is not in line, then try to negotiate with potential buyers for a better deal.
Furthermore, suppose you’re going through a difficult time in your life, e.g., sick parent/sibling students, etc. In that case, you may find it hard to give 100% focus on your business which means problems can occur. which can cause even bigger problems down the track depending on how big these issues are when they appear.