Why Do Small Businesses Fail?

Why Do Small Businesses Fail?

More than half of small businesses fail within five years of starting up. This tragic statistic is indicative of today’s challenging business climate. In fact, this statistic is significantly worse than before the Great Recession. Why are start-ups failing to take root and thrive?

It’s impossible to identify a singular cause for high startup mortality rates, but all paths lead to the same problem: running out of capital. Investor expectations, combined with the requirements to stay on top of debt, can completely suck the lifeblood out of a young company.

Insufficient Funding

Some businesses are critically injured from birth. The need to raise capital is a necessary evil that every business founder has to grapple with. If a founder fails to raise the necessary capital to fund operations, they are left with few options:

Take on personal debt to fund the business.

Liquidate assets and empty personal accounts to fund the business. Approach the three F’s (Friends, Family and Fools) for emergency funding.

Some founders choose to do the best they can with what they have. This can be a recipe for disaster. The market doesn’t care about your passion, your hopes or your dreams. Customers need to be marketed to, and the service they receive has to be better than the competition.

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p style=”text-align: justify;”>“If you don’t have a competitive advantage, don’t compete.”
-Jack Welch
Proper funding is necessary in order to deliver quality service. You can only cut costs to a certain extent before your customers feel the pinch. If your competitive advantage is sacrificed on the altar of low-cost, you’ll quickly lose the trust of your clientele; leading to business failure.

Poor Cash Flow

After funds are raised and a company is launched, your business needs to generate enough revenue in order to continue operating. Multiple factors impact cash flow. These are the most common issues SME’s face:

Low Profit Margins

High Operating Costs

Marketing Expenses

Debt Servicing

Taxes

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p style=”text-align: justify;”>Personal Expenses (especially in the case of Sole Proprietors / Sole
Traders)

Royalty / Licensing Agreements

Small and Medium Enterprises (SME’s), especially startups, have to carefully monitor their expenditures. Failure to account for every dollar that enters and leaves a company’s accounts can spell disaster. It’s easy to let expenses grow in an effort to tackle company objectives. Successful companies carefully balance the costs of every decision with the revenue it generates. If the expenditure cannot be recouped within a short period of time, most startups should avoid the expense.

Before making a decision to spend a significant sum of company funds, consider performing a Net Present Value (NPV) and/or Internal Rate of Return (IRR) analysis. Understanding how business expenditures help, or hurt your bottom-line before stroking a check can save a struggling start-up from financial disaster.

Business Tax Complications

Every business has a silent partner. This silent partner must be paid a percentage of company revenues quarterly, bi-annually or annually. In the United States, every company has a silent partner called the Internal Revenue Service (IRS). Failing to pay Uncle Sam his due can mean stiff penalties, harsh fines and potential jail time.

Mismanaged companies regularly fail to collect appropriate sales taxes and withhold necessary funds to cover payroll taxes. Getting behind on taxes is a very common startup mistake. The IRS understands that getting caught up and digging your business out of a hole is a difficult, scary process.

Thankfully, tax debt relief is available to companies that are willing to keep lines of communication open, agree to a repayment plan and honor their obligations.

Tax Debt Options

The first step in solving any problem is gaining a complete understanding of the issue at hand. Tax debt can be difficult to compute, and sometimes the tax bill that your business receives is unfair. Professional guidance is highly recommended when dealing with the IRS. Failing to properly handle tax debt can mean unnecessary expenses and the potential collapse of your business.

Declaring Bankruptcy

For some companies, the thought of waving the white flag and taking advantage of a legal do-over is appealing. Bankruptcy involves the liquidation of all available assets in order to satisfy outstanding debts (usually for pennies on the dollar). Some debts are completely wiped away, while others are renegotiated into smaller payments, or one lump-sum.

For individuals and businesses that file for bankruptcy in order to resolve their tax debts, the end result is a black mark on their financial record that lasts a lifetime. While credit reports usually drop the tax-related bankruptcy from a credit report within 12 years, financial institutions will usually ask applicants if they’ve ever filed for bankruptcy. This can limit an individual or company’s ability to raise capital and finance future obligations. Bankruptcy, in order to resolve taxes, is a short-term fix with very long-term, life-altering consequences.

For example, many employers consider a bankruptcy to be a serious concern when hiring for open positions. Therefore, future employment prospects can be severely limited by the choice to file for bankruptcy.

Consolidation Loans

Rolling all of the outstanding debt into a single loan can provide a short-term solution to the debt that a company holds on their books. Paying vendors and creditors in full, using the funds from a consolidation loan, will help mend the relationships with these individuals. But, a consolidation loan still needs to be paid off; according to the terms agreed upon with the provider of your consolidation loan.

A consolidation loan may reduce the total finance charges for your debt, but it will not decrease the amount of debt your company owes. For tax debt, a consolidation loan will help you to quickly pay the IRS any past-due tax liabilities. But, consolidation loans simply transform the debt, in total, from one form to another. They do not empower your company to reduce the total tax debt owed.

Tax Debt Relief with the IRS

As an alternative to taking on debt to fund an unfair tax liability, a tax debt relief company will work with you to solve your tax issue in the most favorable manner possible, based on your company’s unique financial profile. The IRS allows for companies to plead their case and substantiate their claims if they believe they owe less in taxes (i.e. establishing a basis for penalty relief).

The first step in the process is a careful, detailed investigation and evaluation by a tax professional. This involves gathering and compiling the necessary information they need to help you receive a favorable resolution to your tax issue. The IRS has created specific programs and guidelines (i.e. the CNC, OIC, PPIA, etc.) to help streamline the process of handling tax disputes in a fair and equitable manner.

Many startups fail to actively pursue the options available to them when they receive an unreasonable tax bill. By reaching the best resolution possible to your tax burden, with the help of a tax debt relief service, you can feel confident that your taxes were assessed fairly. As a result, you and your company may be able to prevent the aggressive collection actions that the IRS is uniquely capable of taking.

Excessive Debt is Fatal for Start Ups

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p style=”text-align: justify;”>Whether the debt a company holds is from unpaid tax liabilities, excessive operating costs, or poor accounting, it’s critical that debt be aggressively attacked. The finance charges associated with carrying debt from one quarter to another directly eat into a company’s bottom-line. Carefully consider the potential difficulties that corporate or individual debt will place on your business’ cash-flow before taking advantage of debt consolidation offers.
With greater financial literacy, start-ups will have a stronger chance of survival as they navigate their way to long-term profitability.

Sources:

//www.brainyquote.com/quotes/quotes/j/jackwelch382558.html

//www.curadebt.com/tax-debt-relief/

https://www.ustaxcourt.gov

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