Skip to content

Six Common Reasons for Business Closure

Six Common Reasons for Business Closure

Six Common Reasons for Business Closure

Nowadays, everyone wants to be an entrepreneur. After all, people enjoy the independence and autonomy of being their own boss – a fantastic feeling of not being answerable to anyone except yourself. As good as it feels, running a business is not for everyone. 

Entrepreneurship is risky because there’s a significant amount of money and assets at stake. Successful business owners know how to deal with and mitigate that risk, while others can’t get a knack for it. 

As a result, they make mistakes and blunders that lead to business failure and closure. A common reason could be retaining an inadequate management team. You might have a team that doesn’t have prior experience working in the industry. 

Similarly, a lagging business model or the lack of capital also leads to business closure. Sometimes, poorly planned marketing campaigns executed publicity can also drag a small business down.                

Truthfully, failure is a topic most of us avoid. But ignoring the warning signs of trouble is a one-way ticket towards business failure. So, why not identify the signs and reasons that put your company into hot waters? Here is a list of six common reasons for business closure.              

Lack of Knowledge & Strategy

Undoubtedly, paying taxes is every entrepreneur’s least favorite thing to do. They don’t wish to share a significant chunk of profits with the government, opening doors to tax evasion. 

Sometimes, tax evasion is a result of a lack of knowledge too. If you don’t know much about taxation, it’s time to learn the basics and educate yourself as much as possible. 

A good starting point would be registering for an llm tax online degree after your bachelor’s. It will bring you up to speed on all the basics of tax filing and returns, helping you stay on top of all tax formalities and regulations.

Despite knowing the ins and outs of taxes, not paying them during the initial phases of company establishment doesn’t seem like a problem, but things can become challenging once you’re under the IRS’s radar. 

At this point, not having a tax strategy would lead to legal penalties. In addition, your company will face a reputational loss, shaking the customer’s trust. 

Often, these IRS inflicted penalties are so substantial that businesses have to close their doors. But, you can avoid this by having a flexible tax strategy in place. 

Leadership Failure 

Often, leaders demonstrate poor management skills, which also becomes a cause of business closure. At times, the leader doesn’t have enough market experience, leading to a case of bad decision-making. 

In some instances, the leadership team isn’t on the same page as the managers, resulting in conflicts on how to run the company. Such pitfalls affect productivity, but wrong decisions can lead to massive losses. 

In addition, dysfunctional leadership trickles down to every aspect of business operation, and once this happens, failure is imminent.

Now, to avoid leadership failure, you have to learn, study, and find a mentor to show you the ropes. 

Second, you’ll have to brush up on your industry knowledge and leadership skills. You can oversee other leaders, their best practices and see which ones you can apply to your business.  

Inability to Adapt

Once business owners are running a company successfully, they become complacent. They don’t pay much attention to the business practices, nor do they take any new initiatives. 

This isn’t the right way of doing business, is it? The inability to adapt to the changing market needs can be troublesome for businesses because it can drive them out of competition in no time. 

Therefore, monitor the market and understand when you need to alter your business plan. You have to keep an eye on customers’ spending patterns and habits to adapt quickly. 

After all, being one step ahead of all the trends will allow you to adjust your strategy and cater to consumers’ needs. 

Ineffective Business Planning 

Does your company have a business plan? Entrepreneurs who fail to address the needs of a company through a well-defined plan set their business up for imminent failure. 

Not having a plan means no progress. Hence, a business cannot perform to its optimal potential without a plan. 

In addition, it becomes challenging for businesses to adapt to changes in the industry because there aren’t any plans in place. 

Before these pitfalls lead to business closure, develop a business plan backed by research. For starters, you have to establish your business model and infrastructure. 

Likewise, identify potential revenue streams, lay out the set of goals, and talk about the company’s vision. 

Remember, maintaining a business plan is crucial for running a successful business in the long term. 

Financial Hurdles 

Most people think not having sufficient funds is a substantial financial hurdle, but there’s a lot more to it. A significant reason why many companies fail is that they have a lot of money tied up in current assets. 

Because of this, they don’t have cash available to pay for routine expenses, leading to overhead costs and additional fees. 

Further, businesses also fail because owners miss markups on pricing products and services. As a contingency plan and for the sake of driving competitors away, companies price their products lower than their cost. 

In turn, they drown into losses and gain nothing out of the pricing strategy.  In addition, obtaining finances is another challenge for businesses. Whether they want to expand or develop a new product, seeking a loan is nothing less than trouble. 

Besides a hectic procedure, the high-interest rates bring another expense to the financials. The only way to protect your company from these hurdles is by creating a realistic budget. 

You have to secure enough funding and allocate finances strategically to keep the company afloat. 

External Economic Factors 

After witnessing the pandemic of 2020, we can understand how external factors affect business. There is always a risk of something unexpected landing on a company’s doorstep and changing everything. 

If not COVID-19, the country’s monetary policy fluctuations can also impact businesses because high-interest rates can increase the cost of borrowing. 

Similarly, the rising inflation rates can increase price levels and raw material expenses, decreasing profit margins. 

Even though one can’t predict these situations, it is possible to prepare for them. You have to build and structure a business model that helps minimize risks to prepare for such events. 

In addition, keep some funds aside for challenging times so that you don’t have to borrow. 

Final Thoughts 

Over time, every business will face downtime. The key is to stand in the face of these challenges and bounce back stronger. 

You have to be aware of things that can be a problem for your company for that to happen. Therefore, manage financial hurdles smartly, plan strategies, and adapt to the changing market dynamics. 

Most importantly, keep your company out of legal troubles by filing taxes on time and adhering to the law. It is impossible to keep the company afloat without proper systems and processes.

Hacks For Students Who Want To Start A Business

Leave a Reply