What’s the biggest cause of business failure?

Are you optimistic or fearful as we enter the first month of 2011? Will it be a year of growth, consolidation, or one in which your business will struggle? I’m a firm believer in taking an optimistic view whilst also preparing for the worst case scenario. With that in mind I was researching the other day some of the main reasons that small businesses fail.

The UK insolvency helpline have gone to the trouble of compiling a list of 65 of the most common reasons for businesses failure. These make interesting reading – ‘fatal leasing agreements’ and ‘personal extravagance’ were two that caught my eye!

But I think they’ve over complicated things – I think there is one area of business that’s the biggest indicator of potential business failure and that’s a company’s ability to get paid and manage cash flow. Whilst I agree a ‘failure to focus on one specific market’ or a ‘failure to adapt products to meet market needs’ might prevent growth and expansion, unless you get paid for the products you do sell to the customers you already have you won’t last very long.

I hope the list compiled by the insolvency helpline isn’t meant to be in priority order as cash flow problems and non-payment by customers don’t appear until 11 and 12 on the list. In my experience working with SMEs it’s getting paid that the biggest challenge and the biggest threat to survival and it’s getting worse – a recent report from Bacs, the organisation behind Direct Debits, reported that in 2010 SMEs had to wait an average of 41 days beyond their payment terms, over 9 days longer than in 2009. Surely this isn’t acceptable?

In support of those struggling to get paid I put together guide to getting paid on time which might be of use.

I’d be interested to hear from you on this topic. What’s the biggest cause of business failure in your experience?

Nigel Musgrove
Business and Litigation Solicitor

For free advice on this topic please call us on 0845 003 5639.