Just as in life, businesses have cycles. Some of those are growth phases, where the company upscales quickly; others can raise concerns about negative cash flow and the risk of bankruptcy. In a financial reality that’s changing faster than business owners can adjust, it’s essential to take a pause and assess the actual economic balance of any company.
Attending to the current reality in a post-pandemic world’s financials, we have listed some relevant information regarding business failure for you to play safe. But before we proceed, let us see what a business failure definition is.
What is Business Failure?
When a business stops operating due to its inability to turn a profit or generate enough money to pay its bills, it is said to have a business failure if a prosperous company does not produce enough cash flow to cover expenses. It might result from insufficient funding, faulty operating management, weak competitiveness, and a frail unique selling proposition.
What are the Consequences of Ignoring Business Failure Signs?
Most newly founded enterprises survive for approx five years, around half of them. In contrast, only one-third of them make it to ten years. Companies with the courage and aptitude to survive the formative life of expansion can risk business failure if they overlook the cautionary signals very often.
Lately, the outbreak of Covid-19 has significantly changed the competitive environment for both small and large businesses. The Organization for Economic Co-operation and Development claimed it to be among the most significant economic crises of recent times as it has culminated in a substantial drop in consumption which has reduced the financial means of many companies leading them to business failures or bankruptcy situations.
According to the survey, Yelp says that more than 97,966 companies have permanently closed due to the outbreak. At the same time, many others are having difficulty continuing to function.
Business failure examples
Let’s look into some prominent companies which declined to bankruptcy and were shut down as a result. First of all, we have the Polaroid Company. It was established in 1937 and is famous for its instant films and cameras. Unfortunately, the Polaroid company was more into their economic ventures of historical success while neglecting the need to adapt to technological advancement to expand their reach and strengthen their long-term viability. As a result, the company was declared bankrupt in the year 2001. The brand and all the assets were passed over to the Impossible Project, which began in 2008 by introducing new instant films for Polaroid cameras.
Another major failure is Pan American World Airways. It was established in 1927 as the most significant foreign airline in the US. Mismanagement on the part of the company, disregard for its main international carrier, and poor regulatory practices are responsible for Pan Am’s demise.
3 Clear Signs of Business Failure
The primary signs that should never be underestimated are as follows:
● Sign 1: Negative Cash flows
Cash flow statements are where you should start looking for warning signals of problems. If the cash flow statement is negative, it means the business is spending more money than it is making. When cash flow is consistently negative, you will have a business failure risk.
● Sign 2: Insufficient Sales
Sales don’t remain constant, it fluctuates. You’ll probably experience peak and off-peak business seasons; however, if you experience a continuous “slow season,” it might indicate that your company is in trouble.
No firm wants to witness or acknowledge declining revenues and a dwindling consumer base. Hence, you must take action immediately if you notice that these problems are establishing a pattern in your company.
● Sign 3: Low Profitability
Profit is equally important as sales to make long-term business viability. Conversely, poor profitability is also one of the first signs that indicate a struggling business.
When a company struggles to turn a profit and no clear road to profitability is seen, it won’t be able to fund itself internally. Consequently, it will need to raise capital from outside sources, opening itself to a whole new set of risks.
How to Fix the Situation? 3 Tips for Business Recovery
To prevent business failure business consider the following:
● Tip 1: Ratio analysis Test
Financial information ratio analysis typically identifies warning indications of probable financial hardship long even before business really begins to fail.
To fully comprehend the situation of respective companies, business owners must regularly and carefully review their financial records. These will enable you to make sufficient strategic decisions supporting growth and long-term profitability.
● Tip 2: Revise your business strategy
Business owners must revise their business strategies and develop a solid start, stop and continue retrospective strategy to support business recovery.
Perform market research and determine the customers, their needs, buying habits, etc., to map out the expansion of their company. Also, to prevent falling behind, they never lose sight of their rivals and take the initiative regarding the current market trends. On the other hand, the business owners must evaluate which stores are struggling to function or no longer exist because of the business failure.
Having all this information in hand, make new strategic decisions to make your way to recovery. See what new you can introduce, what must stop, and what can be continued by adjusting swiftly enough to shifting consumer shopping patterns.
● Tip 3: Reallocate funds to support new objectives
Make a list of your present resources, then change how you use them to meet your new goals. For Instance, keeping in mind the precautionary measure to prevent the outspread of Covid, businesses prioritized the need to spend money on new software or web conferencing to support newly distant teams and carry on with business as usual.
Warning indicators are present when a business is in trouble. Knowledge is the only way to safeguard whether you’re an employee, consumer, supplier, or investor. So research, evaluate and keep an eye out for odd behavior.
Successful business operations demand ongoing attention to detail. Work for your betterment, make efficient choices, and keep up with the most recent innovations and industry best practices. If you follow these steps, you’ll prevent bankruptcy while also positioning yourself for success in the long run.