Reasons why a profitable business may fail

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According to statistics, up to two-thirds of new companies will fail during the first 12 months of trading. This statistic may be even worse in some areas of the UK. Running an enterprise is always challenging, especially in the initial year, and even a profitable company can face problems that may lead to its demise. It is crucial to remain aware of the potential pitfalls if the business is to stay viable, even if it is making money.

Here are some of the most common reasons why an apparently successful company may fail:

Not focusing on the core business

One of the reasons why a company may not succeed is not focusing on the main business. Although it may be necessary to move into other markets once the company is making a healthy profit, it is unwise to have too many projects on the go. Spreading the company resources across various markets, without adequate research, could lead to it making a loss. Prior to moving into another niche, make sure you have the required expertise, funding and other resources to ensure success.

Poor management of cash flow

Although a company may be profitable, it may not have adequate cash. This may be due to clients not paying on time, or expenditure being too high. A management accounting service will maintain a healthy cash flow so that you always have adequate funds to meet your costs.

You may also consider tighter credit controls so that you limit the likelihood of outstanding debts. Enforce stricter measures, so that clients are more likely to pay promptly. Even if your balance sheets show a profit, you still need the cash to meet regular expenditure.

Insufficient customers

If you rely on a small group of clients for most of your revenues, you have a higher chance of failure. If one of those clients has to close their business, this will have an adverse effect on your company’s finances. If most of your income is from a small number of customers, consider broadening your horizons and searching for new clients. If just one regular client closes their operation, you could be left with unpaid invoices and reduced future income.

Although it is unwise to over commit, it is better to be stretched than be negatively affected by a client becoming insolvent.

If you would like to know more about protecting your company from failure, give us a call today.