Research shows that one third of business failures are due to inadequate financial managementOf course
this doesn't mean that a lack of financial management measures will automatically cause a business to fail.
But it's instructive to see where failed businesses went wrong, and therefore, what a business should avoid to
become successful.
An analysis conducted by the UK Government Insolvency Service reveals that financial management inadequacies were a
primary cause of failure in just under 30% of compulsory liquidations. The failures were made up of
undercapitalisation, over-optimism, excessive overheads, inadequate planning, lack of accounting information,
erosion of margin and other factors. Tax related matters account for a further massive 20%.(download report here)(163kb pdf file)
This is nothing new. Surveys conducted by the American-based small-business advocacy group NFIB Research
Foundation over the past 25 years have consistently shown "cash flow" as a top ten small business problem.
(download report here)(1.31mb pdf file).
And a University study cited by CPA Australia has pointed out that the single largest contributor to
business failure is "financial mismanagement", responsible for 32% of all business failures.
"Financial mismanagement" is described in the study as a lack of business experience (which by implication leads
to a tolerance of poor reporting), cash flow problems, being undercapitalised, excessive private drawings, overuse
of credit, no budgets and inadequate provision for tax. Among failed businesses, 12% have inadequate or inaccurate
records.
Just being in business carries the risk of underperformance or failure, due to inadequate financial
management.
On the other hand, it's clear that enduring, successful businesses have joined the dots; They have understood
the direct connection between the cost of financial management measures, and the bottom-line yield generated by
lower operating costs, lower risk and higher profits from exploited opportunities.
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