Why do businesses fail? Follow the money

You may have an outstanding product, an outstanding pitch and the expertise to put all of that together, but if you can’t handle the financial end of your business, you won’t be in business for long.

A study by U.S. Bank showed poor money management as the overwhelming reason that businesses fail. These are the top five:

• 82% – Poor cash-flow management or poor understanding of cash flow.
• 79% – Starting out with too little money.
• 78% – Insufficient research before starting and lack of a well-developed business plan.
• 77% – Not pricing properly.
• 73% – Being overly optimistic about achievable sales.

Four of the five are money-based issues – no surprise there. Thinker is a business-development firm, and it isn’t just startups that struggle with understanding how much they have to spend for every dollar they bring in. We’ve worked with companies that have been in business for more than 25 years that couldn’t break down their costs of goods or services sold or accurately track their assets.

For many business owners, just doing the work to create a budget and following that budget would solve many of their issues. InDinero, an online tax and financial service firm for small businesses, offers a Guide to Building a Small Business Budget to help you at least get started to where you need to go. Too many people go into business because they believe it will be fun, but for many of them, such things as business plans and building budgets are drudge work – the opposite of fun. However, budgeting is important:

• Having a shared budget is critical to company culture. When everyone knows the budget, it is easier to focus on cost-saving measures.
• Setting goals keeps you focused on the long term. By forecasting, you can plan for investments and growth.
• Every business goes through ups and downs, and if you’ve budgeted to have reserves when cash is running low, you’ll survive where most fail.
• When you know your numbers, you make better decisions.

A key ability in business to have is the ability to say no, and it’s easy to say no when your budget tells you you can’t afford something.