Why Do Businesses Fail, and What Can Be Done About It?

Business Failure

According to the Bureau of Labor Statistics and Guidant Financial, about 20% of businesses fail within the first year, and 50% fail within the first five years. Companies fail most commonly because there’s no market for their product or service (42%). If you are one of the so-called lucky survivors, your chances of making a profit are only 40%.  When you add that only 30-40% of businesses listed for sale ever sell, you are one of the actual minorities of a successful exit plan.

Running a profitable business requires a comprehensive understanding of your overall business health and the key pillars that contribute to its success—identifying the reasons behind the statistics that guide on improving your chances of success. By conducting a Business Health Assessment and understanding the Big 4 Financial Statements, you can gain valuable insights and take strategic actions to increase your profitability.

1. Understanding your overall business health

To have a healthy and profitable business, assessing and optimizing various aspects of your operations is crucial.

The seven pillars of a healthy business include:

– Sales: Assessing your sales processes, strategies, and effectiveness is essential for generating revenue and increasing profitability. By analyzing your sales metrics and identifying areas for improvement, you can enhance your sales performance and drive growth.

Marketing: Evaluating your marketing initiatives, including branding, advertising, and customer acquisition strategies, is vital for attracting and retaining customers. By understanding your target market, analyzing your marketing efforts, and adjusting your strategies accordingly, you can improve customer engagement and increase sales.

– Operations: Optimizing your operational processes, including production, supply chain management, and resource allocation, is crucial for efficiency and cost control. By streamlining operations and identifying areas of inefficiency, you can reduce costs, improve productivity, and ultimately increase profitability.

– Culture: Building a positive and productive company culture is key to attracting and retaining top talent, promoting employee engagement, and fostering innovation. You can create a motivated workforce that drives business success by nurturing a culture that values collaboration, transparency, and continuous improvement.

Customer Centricity: Placing the customer at the center of your business is essential for long-term success. By understanding customer needs, preferences, and pain points, you can tailor your products or services to meet their expectations. This customer-centric approach leads to increased customer satisfaction, loyalty, and ultimately, profitability.

– Vision/Strategy: Having a clear vision and well-defined strategies is crucial for guiding your business towards profitability. You can align your resources and efforts toward achieving sustainable growth by setting specific goals, identifying key performance indicators (KPIs), and developing actionable plans.

– Financial Responsibility: In addition to understanding the above six (6) pillars of a healthy business, understanding the Big 4 Financial Statements is essential for assessing your financial health and profitability. These statements provide valuable insights into your business’s financial performance:

A. Income Statement: The income statement summarizes your revenues, expenses, and net profit or loss over a specific period. By analyzing this statement, you can assess your revenue streams, identify cost drivers, and make informed decisions to improve profitability.

B. Statement of Owner’s Equity: This statement tracks changes in the ownership value of your business. It reflects investments, distributions, and retained earnings. By reviewing this statement, you can assess the impact of financial transactions on your equity and make strategic decisions regarding capital management.

C. Cash Flow Statement: The cash flow statement tracks the inflows and outflows of cash in your business. By analyzing this statement, you can identify cash flow patterns, manage working capital effectively, and ensure sufficient liquidity to support your operations and investment activities.

D. Balance Sheet: The balance sheet provides a snapshot of your business’s financial position at a specific time. It presents your assets, liabilities, and owner’s equity. By reviewing this statement, you can assess your business’s solvency, liquidity, and overall financial stability.

2. Conducting a Business Health Assessment

A Business Health Assessment involves evaluating your business’s overall health by understanding and analyzing the seven pillars mentioned above. By conducting this assessment, you can:

– Identify Strengths and Weaknesses: Assessing your business’s performance in each pillar and analyzing your financial statements helps identify areas of strength and weakness. This understanding allows you to capitalize on your strengths and address weaknesses to increase profitability.

Develop Actionable Strategies: Based on the insights gained from the assessment, you can develop targeted strategies and action plans to address the identified areas for improvement. By implementing these strategies, you can optimize your operations, maximize revenue generation, and improve profitability.

Monitor Progress: Regularly conducting a Business Health Assessment and monitoring your financial statements allows you to track your progress over time. By comparing your current performance to previous assessments, you can assess the effectiveness of your strategies and make necessary adjustments to achieve sustainable profitability.

Understanding your overall business health, analyzing the seven pillars of a healthy business, and conducting a Business Health Assessment are crucial steps toward improving your chances of profitability. By assessing your business’s performance in sales, marketing, operations, culture, customer centricity, vision/strategy, and finances, you can gain valuable insights and develop actionable plans to increase profitability. Remember, a proactive and holistic approach to business health is critical to long-term success.

Learn What Can Be Done About It when Businesses Fail.

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