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Business failure: an autopsy

Provided by the International Finance Corporation


The most important thing in business is having a product or service that customers want, at a price that they are willing to pay, and that provides the owners with an acceptable return on their investment. We will assume that you already have the first of these three things. Otherwise, why are you in business at all? If you aren’t sure, you might want to consult the guidance on marketing.

But back to the numbers again. It might come as a surprise to learn that a common reason for business failure, is success. Yes, you read that correctly, success. And when success comes, make sure you understand your financial position!

This all too common scenario will help explain. Amira full story can be read here

  • A start-up business is very successful. Business is good and a reputation for quality products and services has been won. After three or four years of success in the local market, the owner is tempted to expand into new markets. Amira, the owner, is careful and intelligent and has taken great care to ensure the expansion is a success. New financial backers are found. New production facilities are leased and new staff hired. A clever marketing strategy is implemented offering credit terms and discounts to new customers.
  • The opening of the new facility is a success. In fact, business is better than expected. Customers particularly like being able to buy on generous credit terms. Production is increased, overtime is offered to staff, more storage space is leased to accommodate higher levels of inventory/stock of materials. Amira is working long hours to stay on top of everything, insisting that all customers get her unique personal touch on all their transactions. Customers are very happy. Staff are delighted with the overtime. The investors are very happy with the financial outlook.
  • But…..
  • After a few months of higher than expected production, staff begin to show signs of fatigue. Amira is also suffering for the extra workload. Quality issues begin to arise. Some new customers return their products and cancel their credit agreements. Old customers complain that they are not receiving the discounts offered to new customers and a few begin to find new suppliers. The financial plan for the expansion was based on a certain level of costs. The extra expenses required by the increase in credit sales is not matched by immediate income. Cash is now a big problem. The business can’t bring in enough cash to meet current orders.
  • Additional funding is found to keep things going, but when Amira has a family emergency, her attention is drawn away from the business. Things quickly go downhill. Staff go on strike for more money, more customers complain about quality issues, and the investors get cold feet and ask for their money back.

So, even though the business had great products and services that people want, even though there was enough money still to come from customers to pay for everything and still leave a healthy profit, the businesses failed.

Did this story have an inevitable ending? Clearly there are always many factors involved in any business, but knowing your key businesses numbers is often the key to making better decisions and thus making sure it doesn’t end in failure. Being aware of your businesses financial position is also essential when trying to secure sufficient financing for growth and investment.

 

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2121 Pennsylvania Avenue, N.W., Washington, D.C. 20433, www.ifc.org

The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law.  IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or  liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon.

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