Commercial Collections Blog

Cash Flow Problems? Common Reasons for Why Businesses Fail

Cash Flow Problems? Common Reasons for Why Businesses Fail

If you’ve been fortunate to be in business for long you’ve probably seen your fair share of good deals going bad, bad deals on rare occasion turning out right, and good deals becoming great deals. Success in many cases was a result of being in the right place at the right time with the right people, but it could be argued that success is also the result of having a clear vision, the tenacity to put in years of hard work and an iron resolve to make the vision a reality.

Interestingly, startup failures and the post-mortem results have been an area of serious study in recent years. Neil Patel at Forbes.com cited a survey of 101 startup failures conducted by CB Insights, and wrote in early 2015 that “Nine out of ten startups will fail.”  The CB Insights report was recently updated for the second time this year July 2016 and now encompasses a total of 166 startup failures in its analysis. (You can read the whole report here) The study continues to seek answers for the big question, ‘what are the few primary drivers of startup failure?’

The fantastic result of the CB Insights study is that it gives the public access to interviews with many of the founding entrepreneurs who willing provide details and specific reasons for the failure of their ventures.  There is certainly invaluable wisdom revealed in many of those stories.

In their data on startups that died, CB Insights discovered that they usually die 20 months after raising financing and after having raised about $1.3 million. These are critical facts for anyone who is seeking to raise debts or investor capital for their business and it demonstrates that changes in a company’s capital structure are often a defining moment and can result in failure when poorly executed.

Also, the CB Insights study found that there are usually multiple reasons for business failure in each case, but the lessons to be learned from the data reflected the most frequent reasons cited for the failures.

We encourage you to read the CB Insights report, but we’d also like to summarize some of the salient reasons for business failure in the report regarding capital structure changes:

The sixteenth most common reason for failure according to the CB Insights report was failure to obtain financing and investor interest. In the analysis of failures, this issue was a contributing factor in 8% of the cases. This issue is tied closely to a more frequent problem which ranked second on the list of common reasons for failure.

Running out of cash, this was a contributing factor in 29% of the startup failures. In economics, we learn that money, resources and time are scarce and need judicious allocation. The question of ‘how and when you spend your money?’ was a frequent challenge and cause for failure mentioned by the failed startups.

In our experience collecting commercial debts at Burt and Associates, running out of cash can often be contributed to a lack of business planning.  Unanticipated expenses, sudden losses, weak assumptions regarding revenues, miscalculations in initial investment costs, and a failure to raise capital at critical milestones often results in the downward debt spiral of a business.

Running out of cash is often tied to other reasons for startup failure including product-market fit and failed pivots. In the CB Insight study, the thirteenth most common reason for a failure occurred in 10% of the studied failures; this was the “pivot gone badly.”

By “pivot,” the report is referring to critical decision-making moments.

In the cases studied, there were times that decisions should have been a matter of calculation with the results measured. But in some of these failure cases, changes to the business strategy or operations were made without any review of the results. As a consequence, in 10% of the cases, poor decisions had an unendingly adverse effect on the cash flows of the business. There was no chance to recover before substantial damage to cash flows occurred.

But the number one reason contributing to 42% of the failed startups was, “No Market Need.”  The entrepreneur was busy solving interesting problems that didn’t serve a market need. Essentially, failing to identify a “market need” is a sure way to be stuck with a product or service that can’t be sold because it had too little or no market demand. No market demand for the business’s goods and services means no sales revenue, and the mounting fixed expenses plus the weight of debt inevitably drives the business into bankruptcy.

 when playing the game it’s easy to get caught up in looking at the scoreboard instead of playing the game with eyes on the ball

That being said, when playing the game it’s easy to get caught up in looking at the scoreboard instead of playing the game with eyes on the ball.

Focus, clear vision and the tenacity to work hard are what create successes out of and in spite of failure.

It can be boiled down to the “5 P’s”; critical to success in your business is having the right People, Processes, and Procedures in place so that you can create the Profits you are Planning. (also find our 6 P’s)

At Burt and Associates, we want to help you avoid cash flow problems, and we want to be part of your team of people that participate in the processes and procedures that protect your profits. We can do that by creating custom debt collection solutions, giving you more time to focus on the important work that moves your business forward. We want to help you be in the right place at the right time financially so you can pursue opportunities that make a profit.

When you have debt collection issues and need someone on your side, or maybe you want a better understanding of how you can recover cash owed to you, you can count on Burt and Associates to help. Contact us today through our website, email, or by phone. Our representatives are eager to help you create solutions that protect your cash flows.