Predicting Business Failure

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Introduction

In order to predict the likelihood of business failure it is necessary to:-

• Measure the strengths and weaknesses of the organisations management 
• Measure the financial stability of the business.

You should be familiar with these areas as they are highly important to the success of your business.

One method of predicting business failure is by dividing the companies problems into three separate areas:

1. The defects of the Company
   1. Bossy or single minded managers and directors
   2. Idle or lazy management
   3. Lack of financial controls such as budgets of cash flow forecasts
   4. Not comparing actual results to expected results (Variance analysis)
   5. Poor communication with between management
   6. Lack of control over book debt collection
2. The mistakes of the Company
   1. Expanding the operations of the company without sufficient funding in place
   2. Relying too much on the overdrafts
   3. High borrowings such as loan commitments
   4. Bad lack of planning leading to the failure of certain operations
   5. Getting involved in long and expensive legal battles
   6. Allowing certain customers access to extended credit lines
   7. Irresponsible purchasing of goods and materials
   8. Heavy reliance on large customers
   9. Late payment of crown taxes
3. The signs of business failure
   1. Diminishing bank accounts
   2. Hiding or ignoring problems
   3. Falling product or service quality
   4. Lack of specialist staffing
   5. A lack of a predictive business plan
   6. CCJs, Statutory demands and threats of legal action
   7. Poor or lack of communication with the banks

Please note that most business failures can be avoided by thinking about the consequences of the above scenarios. The problem is that most managers neglect all the signals of failure hoping that they can trade out of adverse situations.

The most common scenario is that businesses continue to trade until one creditor suddenly asks for immediate payment and the company realises it may be insolvent.

If you are unsure about the future of your business why not take advantage of a free company HealthCheck or our Interactive Tools for Business.