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The Common Reasons Why Businesses Fail and Go Bankrupt

Running a business is not an easy task in today’s competitive environment. About 45% of businesses fail within the first five years of operation, and 20% of businesses don’t make it through the first two years.

These figures are alarming and might not inspire those looking to start their own business. So, what are the common reasons why businesses fail and go bankrupt?

There can be many reasons why a business fails. Here are some of the most common ones.

Poor Accounting

Poor business accounting happens when business owners don’t properly track their expenses and income. It’s when you wing it and hope for the best-come tax time. Because of this, many businesses fail, and the owners are left with nothing.

And the only option left is to file for bankruptcy. If you want to avoid this happening to your business, you need to take a proactive approach in bookkeeping and accounting. It means tracking every penny that comes in and goes out of your business.

For example, credit card processors will offer you a free credit card reader when you sign up with them. But what they don’t tell you is that they’ll also charge you a fee for each transaction. So, if you’re not careful, those minor transactions can add up and cost you more than the free reader.

And it’ll do more harm if you’re not aware of these fees and you continue accepting payments that way. Many websites offer help comparing merchant accounts so that you can find the best one for your business.

What can you do?

  • Educate yourself on accounting and bookkeeping basics.  
  • Use software or an app to help you track your finances.
  • Hire a bookkeeper or an accountant to help you keep tabs on your money.

No Customer Knowledge

Not knowing who your target customers are is a common issue, and it can be the downfall of any company. For example, let’s say you make the best widgets in the world. But if you don’t know who your target customers are, you’ll never sell any widgets.

So how do you identify your target customers? The first step is to understand who your current customers are. You can do this by looking at your customer data and conducting customer surveys. Once you understand your current customers, you can segment them into different groups.

From there, you can start to look at who your ideal customers are. It’s where you’ll want to define your target market. For instance, you may want to target young professionals in big cities. Or, you may want to focus on stay-at-home moms looking for affordable products.

Once you know who your ideal customer is, you can start to craft a marketing strategy that speaks to them. You may want to create targeted ads or start a social media campaign. The important thing is that you’re reaching your target customers where they are.

Saturated Market

A saturated market is where all potential customers have already been reached, and no new customers can be gained. As a result, companies in saturated markets must compete fiercely for existing customers and often resort to price wars to retain market share.

It’s a bad thing for companies because it means that they can’t grow. Hence, many businesses end up closing their doors. So, how do you go about it?

You can do a few things to combat your market’s saturation. First, make sure that you are differentiated from your competition. You can do this by offering unique products or services that your competitors don’t have.

Second, focus on customer retention. In a saturated market, it’s more important than ever to keep your existing customers happy. You can do this by providing excellent customer service and offering them incentives to stay with you.

Third, don’t be afraid to enter new markets. Even if your primary market is saturated, there may be other markets that you can tap into. You may find new customers and grow your business by expanding your reach.

Inability to Secure New Capital

When businesses fail to secure new capital, continuing operations and keeping the lights on can be complicated. It could result in financial problems and bankruptcy. That’s why businesses need to have a plan in place to raise money when needed.

There are a few different ways businesses can go about securing new capital. One way is to issue new equity, which means selling shares of the company to outside investors. Another way is to take out loans from banks or other financial institutions.

To Sum It Up

The reasons why businesses go under are varied and complex. It depends on the business, the industry, and a whole host of other factors. If you don’t want that for your business, then be sure to have a strategy in place and always be thinking ahead.

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Alan is a content writer and editor who has experience covering a wide range of topics, from finance to gambling.