9 Reasons Any Business Can Go Bankrupt - BusinessTown

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9 Reasons Any Business Can Go Bankrupt


While the 8 out of 10 figure is disputable, the picture is not that rosy for new entrepreneurs. A study by SBA found that a quarter of businesses close within the first year of operation, and a half close in two years.

Want to make it to the other half? Read this article to avoid the most frequent mistakes.

Insufficient Funding

Make it a rule not to start a project unless you have enough money. Many new businesses fail because their owners don’t have a contingency sum to keep them afloat.

Let such a business run for a couple of months without a profit, and the owner will be tens of thousands of dollars in debt.

To avoid this, you should test your business idea in a manner that won’t leave you broke. One way of doing it is to have a buffer sum and access to credit.

Rigid Strategy

Falling in love with your grand plan has ruined millions of ventures. In fact, The Forbes cites it as one of the primary reasons for businesses’ failure.

The thing is, no matter how good your plan is, it’s not worth a dime if it doesn’t produce results. Many people pretend their plan will work eventually, so they don’t adapt and end up in debt.

When creating a master plan, you should keep in mind one thing — that it’s not the only thing that matters. Your success does. Make sure the plan is workable, and adjust it to reality accordingly.

You can check out Agile to do that better. It was originally made for software development, but you can implement the philosophy in your approach as well.

No Customer Knowledge

Not knowing who your customers are is one of the biggest sins in business. Imagine a car salesman who is trying to sell someone a car and doesn’t have any idea who they are. There’s no information about their preferences nor what should you focus on when selling.

That’s what your business looks like when you don’t study your customer base. Here’s what you can do to learn more about them:

  • Conduct prior market research
  • Study Facebook and Google statistics
  • Conduct surveys
  • Conduct personal interviews

Another point to consider is not being overly dependent on customers. If you have one customer that accounts for 70% of your sales, you may find yourself in a desperate situation when they stop buying from you.

Price Competition

If your business grows, but your profit margin keeps dropping, you obviously do something wrong. You may outcompete your rivals in the short term if you continue to lower your prices, but it will negatively affect the quality of your products or services.

In the long term, however, you may not be able to do that. Especially so, if your industry has razor thin margins.

Poor Accounting

Who cares about bookkeeping when you are so fired up about your business? Well, businessmen do. The thing is, if you try to wing it with the numbers, you may find yourself thousands of dollars short of the expected net income.

Budget planning is crucial for any business — from a grocery store to Apple. Just like you would hire a professional for expository academic writing in college, hire an accountant to handle your books.

Poor Leadership

Your business depends on people. If you don’t treat people right, your company will fail within months.

You don’t have to create an elaborate culture for your company, especially if it only employs five people. More often than not, good leadership comes down to getting your employees to like you and become involved in the business.

Another thing that leaders get wrong is micromanaging employees. Sure, you want to do everything the right way and get frustrated when an employee fails. But if you don’t give them any room for growth, you end up with a worker who doesn’t feel validated. You don’t feel that great doing their work instead of delegating responsibilities, either.

If your employees care about the common cause and get competitive wages, your business will prosper.

Dependence on Key Employees

This is the problem that many young businesses face. When you start, there are too many business processes, and you have to hire enough people to handle them. You end up working with a team of multitaskers that make your business a success.

With time, they get so good at it that losing one of them means losing profit that month. Eventually, this can lead to losing your whole enterprise.

Depending on the owner is a bad thing as well. If a business doesn’t run well when you are on vacation, this means you either didn’t inspire employees enough or didn’t create good workflows.

Lack of Customer Relations

Your job as a businessman is to get the job done and get the money. Your job as a marketer is to make the client happy.

People don’t recommend businesses only because they’re happy with the result. They make their recommendations based on their emotions. Surely, you have to do an excellent job delivering your part of the deal. If you want a customer to bring you new clients, you have to do it in a way that makes them feel happy.

A warm smile from a waitress can be something that will make your customer recommend your business to a friend.

The Government

This factor doesn’t depend on you, but you should always consider it. For instance, if you are running a restaurant in NYC, you have to comply with millions of rules. If a hundred of them change and you don’t know soon enough, you may lose thousands of dollars in fines.

The same goes for any other business. Keep your finger on the pulse of legal news in your industry, and you will be able to avoid any trouble.

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