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5 Things that Can Sink a Small Business

For most small businesses, survival (let alone) incredible profits, are difficult. Failure usually results because they are unable to manage costs and predict cost increases. Other issues that typically cause small businesses to fail are lack of management experience, a poor business model and insufficient access to capital.

It is imperative that small business owners are mindful of a range of things that can sink their enterprise. They also need to strategize solutions before problems become major issues. For example, it may be wise for the business to apply for a short-term business loan, through STBLA or another reputable provider, so that it can survive a difficult time and go on to provide quality products or services.

Danger 1. Inability to Manage Costs

A recent survey of more than 1,000 owners of small to medium enterprises (SMEs) revealed that 61% claimed that small businesses fail because costs are not effectively managed.

Danger 2. Resistance to Professional Advice

In this same survey, 70% of respondents reported that they trust their own gut instinct above any type of professional advice. In life this may be an acceptable approach, but in business, it is a very different story.

The most experienced and successful business people know the value of high quality, astute and considered professional advice. Equally, they know that failure to seek and act on sound financial advice almost invariably jeopardises the future of a small business.

Small Business Sinking

Small Business Sinking

Danger 3. Poor Business Models

Of the financial professionals who do work with small businesses, a poor business model is often identified as a prime reason for small business failure. This observation is supported by data from 2011-12 in which the most common reason for small business failure was shown to be poor management at a strategic level.

While the owner of a failed small business may believe that the reason for the business’ failure is ineffective management of costs, financial professionals identify a substandard business model as the reason for the business’ demise.

Danger 4. Buying a lot of the Wrong Product

Quite commonly, owners of SMEs purchase too much inventory of the wrong type of product. Their reason for doing this is often because they are chasing success through revenue. However, it may well be the case that the SME owners neglect to recognise that the costs they are introducing into the business usurp profit margins.

To mitigate this risk, SME owners can benefit from learning about revenue drivers and profit drivers, as the two are quite distinct.

Danger 5. Underestimating the Importance of the First Couple of Years

SME owners need to know that the first couple of years of the life of the business are the ‘make or break’ period. Because this period is so critical, there is no better time to seek the advice of professional advisers, and realise that professional advisers can do so much more for a business than just prepare tax returns.

SMEs face a number of risks and dangers, but being aware of them and taking action to remedy their impacts can help to reduce the likelihood of business failure.

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