How to tell if a business is likely to fail

How to tell if a business is likely to fail

Businesses don’t fail overnight. There are some tell-tale signs that your business might fail. Usually the signs of failure show up well in advance of the business entering a crisis stage. A business owner and his team can take this window of opportunity to take action to remedy the situation before complete failure.

It’s also important to differentiate between a company that is failing and one that is simply experiencing a temporary cash-flow shortage or a seasonal decline in sales.
As business leaders we need to constantly be looking out for some common signs that might tell that the business could be failing. If you recognize any of the signs that will be discussed below you need to take urgent remedial action or you should seek professional advice immediately.

The first sign that shows whether a business will fail or not is availability of customers. For a business to survive it needs customers; without customers, there’s not much of a business.
Managers should constantly market their products to its targeted customers to drive interest and fuel early adopters of their service or product. Identifying the ideal audience for your product is key to establishing a long-term business.

Not keeping the pulse on issues that impact your target customers will lead to declining sales. If the rate of sales growth declines significantly or if sales decline from one year to the other, it could mean the company is in danger of failure.

Management can reverse this situation by adopting radical changes to the company’s marketing strategies. Declining sales could be a result of an economic recession or a change in customer tastes and preferences, or the company’s products or services may be on the decline stage of their life cycles.

New marketing strategies should be put in place to address such a situation.
Another sign that might show that a company is in danger of failure is a rise in customer complaints.
When there is a significant increase in the number of complaints received from customers because they are not satisfied with the product, or customer service or the post-purchase service they received is an early warning sign of potential trouble for a company.

A fall in customer satisfaction can result in a drop in customers coming for repeat purchases and the same customers tell others about the negative experiences they have had.
Management should find out the primary causes of customer dissatisfaction and implement changes in the company’s operations to address them: failure to address the issues will result in a loss of key customers.
A business that places its reliance on a small number of key customers for the bulk of its revenue can be in serious trouble when it loses one of these key accounts to a competitor.

The managers should quickly identify the reasons for the loss of these long-time customers and make changes to the company’s strategies to prevent a further loss of customers.
Another sign of an ailing business is when it’s operating in cash deficits. A one-time cash deficit can be remedied by using the company’s credit lines.
However persistent deficits over a period of months, point to serious issues with the business because once the company exhausts its cash reserves or borrowing capacity, it will likely fail.

Cash deficit can manifest itself as the business fails to pay bills on time. A failure to pay bills could be symptomatic of a serious cash-flow problem.
Every business goes in times when it struggles with payments but if this becomes a regular occurrence then it might be a sign that the business is in cash flow problems which if not addressed on time might result in the business failing.

These cash flow problems could be a result of late payments from customers which then impact on the company’s ability to pay their own creditors on time.
A company which is constantly receiving payments late from its debtors should look at its credit terms whether it’s not offering unnecessarily long payment terms or has no established collection procedures in place.

If your business has reached its borrowing limits on bank overdrafts or business credit cards, and the bank or other financiers start refusing further financing, then one needs to question why. You should reassess your cash flow situation and take a long hard look at whether your company is in decline.

When a manager spends most of his time trying to sort problems, constantly fighting fires and not addressing strategic issues then there could be a major problem. You would need to identify and tackle the root cause of the problem so that you spend most of your time dealing with core issues in the business rather than being diverted from the main business issues.

When a business experiences a high staff turnover especially of senior executives then this could be pointing to a business that’s on its way to fail.
Normal staff turnover is an unavoidable part of running a business but abnormally high staff turnover is a cause for concern because it might show that staff has low morale, or the company is struggling to pay its employees or they see that the business has no future and hence they jump ship before the business closes down.

If a business diversifies too much away from its core business it will likely result in an increase in costs, and will open up the business to new competition in the diversified industry, and the company will likely lose its competitive advantage.

A business that is too diversified could be an indication that it’s struggling and so is desperately seeking for new sources of revenue. However not all diversified businesses are in problems. One has to assess each business separately.

A business that is holding too much inventory could end up in cash flow problems. Investing too much cash in finished goods or raw materials could leave your business without the cash needed to pay creditors, and also stock could become obsolete while on shelves.
A business that has no management information will fail to make important decisions about the future of the company, or to identify particular problems.
Lack of accurate and timely management and accounting information severely limits the managers understanding of situations that may arise, and reduces their ability to deal with them effectively. A business should have information on cash-flow forecasts, sales forecasts, and debtors aged reports.

These will help management make timely decisions to avoid the business failing. Finally businesses fail because the owner lacks the requisite skills. So if you see a business owner lacking the following skills: strategic thinking and planning, leadership skills, people management skills and financial literacy then it’s a sure sign that the business is destined to fail.

Stewart Jakarasi is a business and financial strategist and a lecturer in business strategy, advanced performance management and entrepreneurship.
He is the Managing Consultant of Shekina Consulting (Pty) Ltd, a multi-dimensional consulting firm, and he provides advisory and guidance on leadership, strategy and execution, corporate governance, preparation of business plans, tender documents and on how to build and sustain high-performing organisations.
He is also a link with international investors intending to invest in the country. For assistance in implementing some of the concepts discussed in these articles please contact him on the following contacts:, call on +266 58881062 or WhatsApp +266 62110062.

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