How can a profitable business go bust?

How can a profitable business go bust?

May 26, 2023 by Sandra

Did you know that over 50% of businesses fail within their first three years? Or that 30% of businesses don’t even make it to the one or two-year mark?

It’s a pretty alarming figure, isn’t it? Of course, there are several risks associated with start-ups that result in such a high number of business failures.

However, once you’ve got through the first few years, the risk of business failure doesn’t simply disappear. In actual fact, the risks faced by businesses are ongoing.

There is a fine line between profitability and insolvency, which is why it’s important to be aware of the reasons why businesses fail so that you can protect your company and ensure that yours is a business success story.

With that in mind, read on to discover six of the most common reasons of business insolvency and why profitable businesses fail.

6 reasons why profitable businesses go bust

1. Problems with cash flow

Without a doubt, cash flow woes are the number one most common cause of business insolvency.

When it comes to running a successful business, cash is king. Although this might sound obvious, it can be difficult to keep on top of all the aspects of running a business whilst ensuring there is always enough cash in the bank.

Even if your business is doing well and bringing in a significant amount of profits each month, it’s essential to keep enough money aside to cover expenses such as payroll, inventory, taxes, and any other essential costs.

It’s also good business sense to keep some money aside in case of unexpected costs. Quite simply, if you don’t stay on top of your company’s finances, even a small setback could be enough to make your business go bust.

2. Over-trading

Following on from the point above, another common problem that can see profitable businesses fail is overtrading.

Overtrading often occurs when a business expands too quickly or aggressively and is especially common with start-ups.

If you are focused on chasing sales but not equally focused on chasing money at the same time, you could end up running out of working capital, especially if your company has a significant cost of sales.

Additionally, an imbalance in your credit terms between your customers and suppliers could make things even worse, so it’s important that your payment terms work for both your customers and suppliers.

It’s fantastic to make a significant amount of sales, but if you are offering your customers 60-day terms but your suppliers expect to be paid in 30, you’re going to run into problems quickly because your cash flow simply isn’t keeping up with the profits being made.

3. Failing to collect amounts due from customers

This leads us onto our next point: many businesses make the mistake of failing to collect receivables due from their customers in a timely manner, instead choosing to focus on turnover.

If your company has a great turnover, that’s a brilliant win. However, if you are invoicing but not effectively following up on collecting the profits you are owed, you can run into significant problems.

4. Not meeting liabilities when they are due

In a similar vein, it’s important to always pay any amounts that your business owes on the due date.

If you are overtrading, juggling your cash flow, or failing to collect what you are owed from your customers, it can be tempting to hold back on the payments you owe until you get things in order.

However, if your business is going to succeed, it’s essential to pay any amounts due in a timely manner to prevent your suppliers or creditors taking steps to enforce the debt - which could result in your company going bust.

5. A loss of a big client or customer

All too often we see businesses rely on just one or two customers for a large percentage of their profits.

It’s easy to see why it happens - after all, if you know you are going to bank all the money you need from a couple of big clients, it’s easy to let smaller accounts fall by the wayside.

However, if you lose one of those clients, you could end up in real financial trouble - which is why it’s so important to focus on acquiring new customers as well as retaining existing ones, so you can ensure you have alternative sources of income should one of your bigger clients walk away.

6. Lack of strategy and planning

Finally, all these points really come down to one thing: a lack of strategy, planning, and forecasting.

A good business practice strategy can help your company to become more competitive, increase sales, and even reduce costs. Make sure you go back to the drawing board and create a thorough business strategy with solid procedures in place.

We’ve all heard of the saying “if you fail to plan, you plan to fail” - and this is especially true of running a profitable business!

What to do if your business becomes insolvent

If your business is showing signs of insolvency or you are struggling with any of the issues raised above, it’s important to act fast.

At McAlister & Co, we are business rescue and turnaround specialists with years of experience providing support and solutions for businesses who are facing financial difficulty.

The sooner you act, the more options you will have available to you - so be sure to contact us today for confidential advice and to ensure the success of your business.

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