Why businesses fail – A look at why some businesses go no further

by Business Zone

It has been widely recognised that business growth and survival depend on both internal and external factors. While most of the challenges which businesses face may be foreseeable, some are completely unpredictable. A number of reasons have been assigned to why some businesses, which at a point in time, were seen to be doing well suddenly crumble.

This article looks at some major internal and external factors that cause some businesses to fail and the need for organisation leaders to keep an eye on them.

Internal FactorsLack of purpose and weak value proposition

Businesses are driven by their purpose, underpinned by strong value propositions. These set the tone for the direction in which a business is headed. As is often said, succeeding without a plan is possible, but accidental success is dangerous. There are some businesses that have achieved successes without a plan. However, could these businesses have been more successful with proper strategic direction and purpose? That’s very possible!

Lack of purpose and values could mean that the business is operating on weak or no footing at all. ‘Touch-and-go’ decisions and related resources committed by any organisation with such traits is likely not to achieve the desired business objectives.

Values and purpose that employees can identify themselves with result in a great sense of belonging and greater employee commitment, without which productivity suffers. Having a weak purpose and organizational values is risky; having none is as worse.

Weak corporate governance practices

Much has been written about the loss of public trust in institutions and organisations of all types since the global financial crisis.

In Ghana, corporate governance has been mentioned in all discussions around the recent banking crisis. Corporate governance involves all the methods a corporation uses to protect its investments and the interests of its stakeholders.

The way business leaders conduct themselves and communicate on a daily basis – and the ethics and values they exhibit in doing so – are instrumental in setting the ‘tone from the top’. This tone shapes every action, decision and relationship across the organisation. As a result, the right leadership tone is the starting-point and bedrock not just for corporate governance, but also for the effective overall management of any business.

A company that does not adhere to best corporate governance practises runs the risk of weakening the confidence of its shareholders. Shareholders who feel threatened by the organisation’s sacrifice of long-term sustainability for short term returns will sell off shares. A large share selloff may lead to falling share prices which consequently devalue the company.

Organisations with a reputation of bad governance practices lose ‘ethical’ customers, key employees and attract increased regulatory oversight. Such organisations find it difficult raising finances. They also risk making bad investment decisions as a result of poor risk management which ultimately leads to the collapse of businesses.

Working capital challenges/overtrading

Every business aims to expand its product and service offerings through various product and market development strategies. Businesses make significant capital investment to expand production and operation capacities to achieve growth.

Such growth, as much as it is desired, needs to be managed to avoid unintended consequences of overtrading being a victim of their own successes.

Overtrading occurs when a business expands too quickly without having the financial resources to support such a quick expansion. This results in liquidity challenges where businesses are not able to meet their liabilities as they fall due. Suppliers then resort to ‘cash before delivery’ terms further complicating working capital challenges when other financing options do not materialise.

In fact, over-trading is very common – it probably kills a greater number of businesses than the more obvious problem of not having enough demand for product offerings. According to the PwC Global Crisis Survey 2019, liquidity issues are the most disruptive crises businesses face. It is also a hidden danger that can blind-side any company unless it is addressed head-on.

Poor crisis management

A highly competitive, volatile global marketplace is a double-edged sword, providing great opportunities for growth while presenting abundant sources of risk.

Unpredictable and unwelcome events, either internal or external, can negatively impact even the most stable businesses.

A crisis can trigger serious problems, including declining earnings, liquidity and cash-flow shortfalls. Lack of confidence and pressure from stakeholders, suppliers and customers, as well as regulatory scrutiny, demoralisation of staff and reputational damage are some of the major concerns. A delayed or limited response to these issues can be extremely damaging to businesses.

About 69% of business executives have experienced some form of crisis in the past 5 years (averaging 3 crises within the same period) with 95% expecting to be hit by one in the future (PwC Global Crisis Survey 2019).

About the writer

George Arhin is a PwC Partner responsible for companies operating in the Energy, Utilities and Resources (Mining) Industry and heads the PwC Business School.

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