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Why do businesses fail?

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It is often surprising that once known and flourishing companies all the places suddenly went under, that is, ceasing to operate as a result of what seems to be even very funny atimes. The rate at which businesses fail, especially in the developing economies, calls for severe concerns, and hence efforts should be made to at least reduce the incidences of business failure. The late 80s and the early 90s no doubt signaled a new era in forming various companies, most notably in the service industries.

The ‘revolution’ of the Finance Houses has not left our memory. For those who lost their money, they can hardly forget! Even for those of us, who were not direct victims, the memory of that era can hardly be wiped off completely. We could still recollect the accusations and counter-accusations by the then Military Administrators and even civilian Governors on the involvement of the Finance Houses in many shoddy deals. It is hard to forget, one dare to say. That the so-called “golden era” of the Finance Houses went down so ingloriously is a lesson not to be forgotten.

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Some of the issues may not be peculiar with the finance houses, and it indeed extended to other industries at an even more alarming proportion. However, the attention given to the collapse of finance houses is hardly comparable to that of any industry in our clime. The logical question to ask, therefore, is why do these businesses fail at the rate they do?

The success of any setup or venture is a combination of many factors, including but not limited to the proper harnessing of its various resources to achieve the desired ends. These resources range from human to non-human, ideally requiring a proper mix for sustainable growth and development. At the center of such is the process of decision-making and its implementation. This is the apt summation of the essential ingredients for success; however, the focus is on the other side of the coin.

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No doubt, many reasons can be adduced to explain the incidences of business failure, taking cognizance of the peculiarities of individual organizations in terms of the type of industry, the scope of operation, and quality of management. Some of these reasons which have general appeal will be looked into.

Mismanagement constitutes a primary reason for business failure. The term ‘mismanagement’ should not be seen from its narrow perspective alone. Mismanagement entails much more than misappropriation of funds characterized by fraudulent practices to include taking wrong decisions at the right time or decisions at the wrong time. It includes the inability of management to derive the best outcomes from the available resources and extends to the incompetency of operations. Furthermore, it includes the aspect of leaving things to chances when decisive action should be taken. It even seems that all other reasons for business failure will have a ready home under the broad umbrella of mismanagement.

Wrong investment decisions are always capable of wreaking havoc on a company, especially when such investments are fundamental to the success or otherwise of such a company. The standard type of wrong investment decision is using short term funds to finance long-term projects. In actual fact, this happens to be the bane of many a Nigerian business. Honestly, it is such a critical matter that any organization that ignores this fact does so at its own risk.

Personnel management until recent times is often neglected by many organizations. Recruitment is made without due recognition of the needs and means of the organization. Faulty personnel management will deal a heavy blow through sub-optimal results when the round pegs are not found in the round holes. A common situation where people are not engaged in the positions they are more suitable for. Apart from this, it may lead to employing people that are not even required, thereby increasing overhead costs without the associated benefits.

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The syndrome of ‘finding jobs for the boys’ must be admitted is a total negation of personnel management towards achieving efficiency and effectiveness from the human resources deployed by the organization in its labor force.

Often, instances abound where personnel management does not consider the critical issues as qualification, experiences, or personal traits before certain appointments are made. This singular mistake has spelled doom for many organizations, leading to total collapse.

In modern times, with improved scholarship (sound education) on business, management attention is paid to working capital management.

Ineffective working capital management may lead to loss of markets, loss of suppliers’ credit, and goodwill, among others. A company that perpetually fails to honor its suppliers’ demand notice is doing that at its own risk. Apart from that, a situation where the stock level is not adequately planned may lead to a shortage of stocks (inventories), which leads to the loss of good customers. Excess inventories may unnecessarily tying down capital that would otherwise be utilized for other profitable projects on the other spectrum. Whichever way, there should be in place a proper balance to achieve better results.

Excessive managerial control stiffened initiatives, and the company loses in the long run. Some companies, especially small-scale businesses, are in the habit of being the only man or woman taking the decisions without recourse to other people’s ideas or opinions. They regard themselves as experts on every issue, which is far from reality.

Improper record-keeping is also a signal for business failure. Record-keeping includes accounting as well as operational records, which helps to facilitate the decision-making process. In practice, however, such records are either not kept or when kept at all; such record is left much to desire.

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Asides from the above, inconsistency of operations may lead to the collapse of otherwise thriving businesses. The common saying that ‘jack of all trades, but master of none’ becomes very apt in this regard. A company that dabbles into any business at sight will need more than sheer luck to succeed.

In fairness to some businesses that fail, there have been instances of being caught unaware of economic and political factors. Moreover, they can hardly do anything about these. Unfavorable government policy can cause business failure. The recent Twitter ban, for instance, may lead to some businesses failing as their customers’ base may have been negatively impacted.

Economic depression always has devastating effects on service industries, as people become increasingly unable to cope with such services that are adjudged not to be essential.

Businesses fail because of many other reasons depending on their peculiar nature, but some of the above factors indicate business failures.

Oluwadele is a chartered accountant and public policy scholar based in Canada. He is the author of “Thoughts of A Village Boy.”

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