22 Reasons Why Companies Fail

At Revive, we have been advising companies for decades and have seen many economic ups and downs along the way. 

Here are a few of the reasons that we are aware of, for companies failing – and our suggestions to prevent this from happening to your company/business, where possible.

1. Recession & global economic downturn

This is commonly used and the reason that lots of people relate to.  Most people don’t have as much accessible income as they used to have and this has had an impact on sales country wide (and internationally).

2. Bad debt – Debtor has not paid

Sometimes this is an unavoidable situation, no matter how much checking and due diligence you carry out, someone doesn’t pay you what you believe you are due.  This may be because they dispute the amount or simply that they can’t pay.  Either way there is a financial impact on the company that has to write off this debt, especially if it is a large amount, or if other customers don’t pay either. 

3. Competition

Don’t ever assume that your market place is fixed in its current state.

Competitors can enter the market place at any time, and while this has an obvious, visible and quick impact if you are a shop or a restaurant on a high street and a new competitor opens, other sectors can be less aware of their competition and sometimes, by the time they realise, the company may not be able to match the offering being given by the competitors which could build up to a pricing war.  

4. Main contractor squeezing margins – common for construction

Point 3 leads me onto this issue.  Companies can find themselves in a position where contractors they work with regularly start eating into your company’s margins.  This is not always intentionally done but shaving a small % off your margin each time will start to put a strain on your business. 

5. Changes in the market

The obvious changes in the market place revolve around technology but there are other changes which have impacts on market.  I’m thinking legislative changes and changes in fashion or the wants of the consumer.  Again, it’s a question of keeping an eye on what is happening in the wider market place and making sure you are not getting left behind. 

6. Increase in raw material costs

It may sound obvious, and the impact may be less depending on the industry in which you work, but if you are reliant on certain materials then any increased cost of these may not always be something you can pass onto your customers and may end up having a massive effect on the margins and the profitability of your business. 

7. Loss of key staff – generally salesmen

Don’t ever believe that anyone is bigger than your business but it is always important to be aware of what key staff are doing and thinking.  Make sure you understand their personal drivers, wants and needs and address any concerns as early as possible.

Sales staff or client facing staff members are obviously the biggest risk area.  It is always worth looking at writing explicit terms into your sale staffs’ contract to protect your businesses.  If you think this is a particularly high risk for your business it may be worth consulting a reputable employment solicitor to help you with your employment contract.   

The impact of not protecting your business against this risk is obvious in that key clients could be lost to competitors which could potentially have a huge impact on your business.

8. Ill health of key employees – tend to be management

Ill health, in particular long term ill health of key employees will have a similar effect to point 7, however it is obviously harder to mitigate against.  By ensuring the employees share  their knowledge, and resources and tools are understood by as many people within the business as possible you may manage to limit the impact but for small or start-up businesses this can be a critical situation 

9. Employment tribunals

Employment tribunals don’t even have to have a negative outcome for the business for them to cause financial strain.  You could end up with a positive outcome but the time and energy these kinds of enquiries can bring could lead to small business owners focusing their attentions on the wrong things and in some cases losing motivation themselves, particularly when they believe the action is unfounded.  If your business warrants it then it may be worth consulting with a reputable employment solicitor to help you with your employment contract. 

10. Bank pulls the plug

Some banks and financial institutions are more cautious than others.  Some will start the process of calling in their security much faster, with far more automated processes (i.e. less human elements) and aggressive strategies.

Keep in touch with your bank, if you are worried that a breach on the terms of your borrowing may occur then get in touch with your lender at the earliest opportunity or seek professional insolvency advice. 

11. Over expansion – sustainability for their expansion, too early

The growth of any business needs to be carefully managed.  A company that grows too quickly, without considering the impact that accepting increasing numbers of contracts or orders will have on the Company and the financial position of the Company.  The Company’s failure or struggle to deliver these orders or contacts can simply be due to staffing or cashflow and the knock-on effect can be catastrophic.  The Company’s brand, reputation, retention of staff and credibility with suppliers can be damaged beyond repair.

12. Natural disaster – Floods, fires, sink holes

Damage of any kind, whether to the business premises, surrounding area or customer locations can cause serious business disruptions.  Sometimes insurance claims can be made to compensate for the losses, but in a lot of cases, this is not enough.  Sometimes insurance companies will not pay out (or will take a long time to pay out) leaving their business with serious cashflow problems.

Our advice is to carefully read any insurance documentation so that you understand what is and is not covered and take any steps you can to minimise any damage when warnings are in place. 

If you are considering renting premises, check whether it has been affected by say flooding in the past.

13. Weather

The weather can be a key factor for some businesses, such as farmers who have key times to prepare, plant and harvest their crops, for the leisure industry who rely on good weather to attract customers, or for some trades, such as constructions that can only perform certain tasks in fine weather.

These businesses are usually seasonal and are used to the fluctuations in their turnover as a result of this seasonality.  They have learned to make hay while the sun shines.  But what they are unable to do is recover from one or more events that affect their turnover so much that they do not have that bit of money stashed in the bank to cover the low seasons?  Some businesses simply cannot recover from this. 

14. New licenses or regulations – Cutting the feeding tariff on Solar Energy

Every now and again, the Government will change a license or regulation and this ends up having a massive impact on the industry.  An example of this is when changes were made to the feeding tariff on solar energy, lowering the return that people would get from solar panels.  This caused providers and installers of solar panels to lose customers, as it made the solar panels uneconomical, as it would take much longer to get a return on their investment.

15. General misconduct – Fraud

We don’t like to hear of businesses losing money as a result of fraud, scams and theft, but we do hear this all too often and usually this is by somebody who was employed by the business in a position of trust.  It is worth considering if this is covered by the insurance, but a lot of businesses have been unable to claw back the funds that have been pilfered from its bank account by a “bad egg”.  There is a lot of time taken (that could be spent better elsewhere), dealing with the investigation of the fraud, employee issues and dismissal, insurance claims, dealing with the authorities and mitigating media involvement.  It can also leave the owners of the business feeling inadequate, disappointed and let down, reducing their enthusiasm to continue running the company.

16. Tax inspections

Following a tax inspection, a Company may find that they have been consistently making a costly mistakes sometimes over a long period of time.  Once HMRC have looked into this fully the Company can be saddled with a liability which the Company can’t hope to service and therefore the Directors are forced to look at the option of insolvency. 

17. Financial mismanagement

We often hear of companies that are struggling financially, (that previously thought they were doing ok), due to the accounts staff not communicating the problems to the directors. 

It may be due to employing or assigning somebody to do task or contract, that they are unable and not qualified to do.  It could be that that individual would normally be capable of this, but personal circumstances made the individual inefficient or careless.

For a business to succeed it is crucial to employ people with the right qualifications and experiences and to continuously appraise the financial status.

18. Legal fights / disputes

We often see Company’s that have embarked on legal fights and disputes which on the outset are believed to be worthwhile for the Company but can turn into legacy millstones for the future of the business.  Whether it be a Director who was following a principled approach to a unpaid debt or a acrimonious shareholder dispute that should have settled easily but instead turns into an ongoing cycle of order and appeal the Company can sometimes find itself at the point of no return and with no alternative but to consider insolvency. 

This is primarily due to the costs of these actions but can also relate to the energy that is required to progress some disputes and this taking the Director(s) or key members of staff away from the business in hand.

19. Break in the supply chain

Turnover of a company can be seriously affected when suppliers delay supply or are unable to provide an item.  If items are not in stock (or are unable to be supplied in a timely manner), customers may go elsewhere.  It is expected that Brexit will affect the supply chain, as transport may need to go through more checks and increased paperwork and procedure is anticipated.

20. Diversions of footfall

This could simply be a new entry into the marketplace that you rely on.  Someone new can catch the eye of your customers and cause them to make a different choice and your business to lose out. 

Sometime this new competition can be a short-lived thing and the Company can survive this minor blip, easily rectified by a reduction in pricing, sale or simple a bit of diversification yourself.  But the Company needs to prepare and plan for its response and should this not be short term and the Company be unable to respond, then it may be time to seek the advice of an insolvency practitioner.

21. Environmental contamination

This could occur following an inspection by a local authority or perhaps by a regulatory body of some description and will impact your business if it causes you to either cease trading or your trading is to be restricted.  An example would be perhaps a boat that is used within your business is leaking contaminates into the waterways system and this is picked up at inspection.  Therefore, that boat needs some money spending on it and any revenue you could have expected from the boat could be severely impacted.  On a larger scale perhaps this contamination could attract a fine. 

This could be something you can work through, you may need to consider some short term fixes to allow you to work through the problems you’re facing but it may be a good idea to seek advice from an insolvency practitioner to ensure that the decisions you are now making do not make your position worse. 

In a worse case scenario your Company could be forced to close due to the implications of the contamination and therefore you would need to urgently arrange to obtain the guidance of an insolvency practitioner. 

22. COVID-19 and other Pandemics

At the time of writing this is a hot topic and the ramifications are vast and looming large.

Initially it appears that the leisure industry including hotels and catering are going to be the worst hit but experience tell us that the revenue being taken away from this sector and the impact on the incomes of many will have a lasting legacy on other elements of the UKs economy.

Initially we would suggest that you ensure that you are utilising all of the various support packages available to keep your business going, and at Revive we are always predisposed to want to help you to keep your business afloat, saving a business would always be our preferred option.  We would be happy to talk through your unique situation, as we all know this is unchartered water that we find ourselves sailing in.  At Revive we have a wealth of experience of the impacts of financial pressures on companies and individuals and the options available to them.  No one could have planned or forecasted for this situation and we’ll happily discuss different options available for you and the affects these may have on you and/or your business, employees, suppliers etc. 

As with any financial distress situation, getting advice is key, if you want to talk anything through here at Revive we offer a free initial meeting service where the Insolvency Practitioner herself will happily talk you through your current situation and give you the right advice for your own bespoke needs. Call us on 01302 965485 for more information.