Solutions to avoid business failure can vary widely. There are countless businesses around us with different backgrounds, including different target markets and resources. For this reason, the types of risks and solutions to deal with them can also vary widely.
To be sure, no entrepreneur starts a business to fail. They try their best to start, operate and grow the business. Sometimes they are successful. But, at other times, they failed. And failure does not discourage them from starting another business.
Business failures don’t just occur due to internal factors, such as poor management and cash flow problems. But, it was also due to external factors. For example, more established companies pursue aggressive strategies, which ultimately kill smaller businesses with limited resources.
Likewise, when the recession hits, many businesses go bankrupt. That’s not just the case for small and young businesses, but also for large, established companies.
How can we mitigate failure? First, we identify the source of the risk, what are the possible causes of failure. Second, we sort them from the most strategic to the least strategic, which ones have a significant impact and are most likely to occur. Third, we prepare anticipatory steps before the problem actually causes failure.
Mapping possible risks
Business failure occurs for several reasons. It can stem from factors such as inadequate management expertise, cash flow problems, inflated debt, and competitive pressures. And, they represent a source of risk. Identifying risks is the first step to avoiding business failure. Therefore, you need a risk analysis.
You can do some research, ideally before you start a business. It helps you to identify possible obstacles in the future.
Then, you look for related solutions for each obstacle. That way, you can prepare for handling if a problem occurs in your business later.
Risk analysis should also continue even when you are already in business. New problems may arise and require a new approach to overcome them.
Determining the most strategic risks
Business risks vary and they have different impacts. Some have a significant impact others are less significant.
You can make a list of problems or risks that may occur in your business. Don’t forget, you order them based on how significant their impact is on your business. For example, suppose you rank each risk, from the largest to the smallest. Then, you map out how likely each risk is to occur and rank them accordingly.
You can do this in excel. In the first column, you write down the number. In the second column, you list the risks. And in the third column, you rank based on the impact of each risk on your business. Finally, in the fourth column, you rank them by chance.
Develop alternative solutions
Creating a heatmap above helps you focus more. You can prioritize resources to deal with. So, you know which issues should get your special attention first. For example, the risks in the red box of the heatmap above require you to deal with them immediately because they have a significant impact on your business and they are very likely to occur.
Ideally, in your list, you also detail possible alternative solutions. You can dig from past experiences.
Or, you can learn from other people to get information about the key to their business success in dealing with such problems. It will be able to open your horizons and help you determine steps to overcome the risks you face.
Alternative examples to avoid business failure
Small businesses can fail because their business plan is bad, or worse, they don’t have a solid, documented business plan. Another cause is mismanagement of cash flow. Taking on too much debt can also lead to business failure as it causes the financial burden to soar.
Lastly, making sure consumers continue to buy is another way to avoid business failure. Without them, there is no income and no money to cover expenses.
Develop a solid business plan
By creating a business plan, you map out all the possibilities for the future and ensure your business runs successfully. You know what you have to achieve and do to operate your business.
The ideal business plan also includes a contingency plan, which outlines what you will do when an emergency occurs. So, the plan not only includes strategies for generating income and supporting it through various expenses, but also anticipating any future risks.
Take a budget plan as an example. It is one of the contents in the business plan.
Then, forecasting income and expenses is a strategic part of the budget plan. You identify how you make money and how much. Then, you detail how much you spend, how much and for what. With it, you can monitor its realization and take corrective action if needed.
Then, you also make a contingency plan about your finances. For example, you set a cash cushion and emergency fund to protect your finances and anticipate unfavorable deviations in your budget plan.
Oversee cash flow management
Poor cash flow management can lead to business failure. In the United States, for example, 82% of small businesses fail because they mismanaged cash flow.
Cash flow problems occur because the realized cash inflows and outflows deviate from those predicted. It could happen for several reasons, for example, your business sales failed to reach the target. Or, your accounts receivable piled up. Both, make cash inflows drag.
On the other hand, your expenses soar. For example, some unimportant posts show up and cost you a lot of money. You may also run out of cash from paying suppliers too early.
Such problems require you to be closely monitored. You have to strike a balance between your cash disbursements and realized income. You should not allow expenses to soar, which increases the chances of your business going bankrupt.
Bookkeeping is a key part of monitoring cash flow. You can check your transactions to make sure your finances are in order and according to plan. For example, can you identify what expenses are draining your money? Are they important? And what if you reduce it? What will happen?
Avoid unnecessary debt
Debt is one way to increase funds to support the expansion and growth of your business. But, it also carries risks.
You have to make regular expenses to pay them off. You have to pay interest, even when your business is not generating income.
Your financial burden will pile up when you take on a lot of debt. Once you are late paying debts, creditors can file for your bankruptcy
In other words, debt can be a good financing alternative if your income is stable. You can use it to generate more income in the future. Of course, you can take on debt only if the income you will earn is greater than the cost of the debt you take on to finance it.
Thus, avoiding unnecessary debt – not generating higher income in the future – is the solution to avoiding business failure.
Indeed, it can be difficult to start a business with little capital and no debt. But, it’s much better than having to bear debt payments in the future.
Then, if you operate a sole proprietorship, you must be personally liable for your business debts. And, you may have to sell your personal assets just to pay off your business debt.
Ensuring customers continue to buy
Without customers, there is no revenue. And business failure occurs if your business cannot generate revenue as planned. So, to ensure your business continues to make money coming in and avoid business failure, you have to make sure your customers keep buying. You have to maintain good customer service. It becomes a strategy to avoid business failure.