Why Businesses Collapse And Go Bankrupt

No matter which way you cut it, running a small or medium-sized business is a significant undertaking. Starting and running a successful business takes courage, grit, intellect, persistence, and probably a little bit of luck.

According to research by the Small Business Administration, about 20% of startups fail within the first year, and only about 33% survive for at least 10 years. But small businesses are not alone; even well-established businesses can fall victim to the harshness of changing markets or unpredictable conditions. In fact, only 12% of Fortune 500 companies active in 1955 survived to the year 2016.

Even though statistics can be unnerving, that’s also never a reason to not try something if you have an insatiable desire to do so. If you’ve spent a considerable amount of time ruminating on your vision and still feel the need to see it through to fruition, by all means go for it. However, it pays to be mindful of the pitfalls that commonly bring companies to their knees, which we will go over below.

Only Being In It For The Money

As a general rule in life, a person doing something for money alone will usually max out at mediocrity, whereas a person with a genuine passion for the same position or occupation will vigorously outpace them. Many businesses start out on the wrong foot because the entrepreneur is possessed by the ideation of riches and devoid of actual passion or deeper purpose.

In other cases, someone will aspire to start a business because they loathe the idea of working for someone else, or they assume that it will grant them more free time. Neither of these reasons is firm enough to build the foundation of a business upon.

On the other hand, people that succeed in business do so because they truly believe what they are doing, and they’ve done their research and investigation to do it well. They also need to be persistent, because bumps in the road ahead are sure to come, and there’s no buffer when you are the one running the show.

Not Funding Properly

In many cases, a person will open a business using money they’ve saved but miscalculate how much capital is needed to keep the operation running. While ambition can work in your favor, you never want to go overboard and take uncalculated risks.

It’s important to be specific with your monetary figures and to have everything figured out beforehand. Account for contingency, know all the overhead costs inside and out and map out emergency plans if you need some extra funds.

Your credit score can also make or break your aspirations, since the amount of money banks or lenders are willing to give you largely depends on it. If your score leaves a lot to be desired, look into rebuilding your credit history.

Management Issues

Poor management can take an excellent company and make it mediocre faster than almost anything else. Many times poor managers are unable to properly adapt (or refuse to adapt at all) when there is a shift in the market.

According to some research, one of the biggest mistakes management makes is to enact changes that worked in the past when the market changes. In the same way that accelerating a car stuck in mud only digs the wheel deeper, implementing changes during a downturn may only make matters worse.

Other times, a business will experience success and the management will then become complacent and arrogant because of it. A business’ management needs to be careful to not decline into laziness once they’ve seen a bit of return on their labors since things can go bad just as quickly as they got good.

Poorly Defined Goals

One of the best ways to ensure your failure is to never define the parameters of your success or otherwise not defining them with enough precision. This may seem like common sense, but you’d be surprised at just how often aspiring entrepreneurs fail to do this step properly.

While everyone obviously shoots for success, they may be doing so without even realizing what that is for them. As a result, they are left wandering about aimlessly and likely becoming discouraged when they don’t become millionaires after a few weeks.

As if it were needed, studies prove that self-defined goals improve performance. Even if you set the bar low for yourself at first, it gives you something attainable to shoot for. It’s better to break down a monumental task into smaller goals that are more manageable. This way you can stay on track and keep from becoming prematurely bored or discouraged.

An Unmotivated Workforce

Bad management can make a good business go south, but employees are the lifeblood of the company. If people are dreading coming in to work for you every day, chances are they won’t be delivering their best. You want to create a work environment that keeps employees happy about what they do. Some offices manage this by allowing dogs in the office, casual attire, recreation rooms, or even gyms/yoga on the premises.

Shaping a workforce to become motivated starts from the very beginning. Smart hiring practices can improve a company’s market share, so it’s ok to be selective with applicants. After all, not everyone will be a good fit in spite of the work culture or amount of training.