The main reasons why businesses fail are:
1. poor business planning
2. poor financial planning
3. poor marketing
4. poor management.
Leadership is about planning for success before it happens. The Art of War, gave some sound advice that still applies to business today: "When your strategy is deep and far-reaching, then what you gain by your calculations is much, so you can win before you even fight. When your strategic thinking is shallow and near-sighted, when what you gain by your calculations is little, so you lose before you do battle.’
In the financial planning category, 82% of businesses failed due to poor cash flow management skills, followed closely by starting out with too little money. Business leadership is about taking financial responsibility, conducting sound financial planning and research, and understanding the unique financial dynamics of one’s business. Half of the UK’s small businesses fail within the first three years because of cash flow problems. They either run out of money or run out of time. Consumer debt, personal bankruptcies, and company insolvencies are all now on the increase.
The third business failure factor profiled in the study, and a critical one, was marketing. Over 64% of the businesses surveyed in the marketing category failed because their owners ignored the importance of properly promoting their business, and then ignored their competition. Again, as a business leader, you must be able to effectively communicate your idea to the right people and understand their unique needs and wants. Leadership is all about taking initiative, taking action, getting things done, and making decisions. If you are not doing anything of significance to market and promote your business, you are most likely headed for business failure.
You must also know your competition.Leadership is about providing value to customers; if your main competitors are all providing a better quality and lower priced product, how can you possibly create any value? Either you harness your strengths to provide different benefits (such as speed, convenience, or better service), lower your price and improve quality, create a different product for an unmet demand, or get out of the game.
Finally, one of the most important reasons why businesses fail is due to poor management. In the management category, 70% of businesses failed due to owners not recognising their failings and not seeking help, followed by insufficient relevant business experience. Not delegating properly and hiring the wrong people were additional major contributing factors to business failure in this category.
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TO AVOID FAILURE, as a leader of the organisation:
1. You must have a strategy.
2. You must have controls.
3. The Board must participate.
4. You must avoid one-man-rule.
5. There must be management in depth.
6. Keep informed of, and react to, change.
7. The customer is king.
8. Do not misuse computers.
9. Do not manipulate your accounts.
10. Organise to meet employees’ needs.
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Showing posts with label Corporate Failure. Show all posts
Showing posts with label Corporate Failure. Show all posts
Monday, August 1, 2011
Models for Predicting Corporate Failure
Strengths and Weaknesses of Quantitative and Qualitative Models of predicting corporate failure
Quantitative models such as the Z score
Strengths
use publicly available financial data to predict whether a firm is likely to fail.
Calculation is easy to make using the model
Weaknesses
the calculation is only a probability not an absolute likelihood so it may need to be used with other data to make a more rounded assessment.
the model is based on historical trading patterns of a specific group of companies so a change in trading pattern or a company that falls outside the industry grouping used may find the model inaccurate.
companies in trouble may use creative accounting in calculating figures which means where these go into calculations they are unreliable.
Qualitative models such as Argenti A score
Rely on subjective scores to certain questions given by the investigator. A score above a certain level indicates potential disaste. The models attempt to fill in the gaps that quantitative models leave by using in-depth questionnaires but again these have their flaws. For isntance Argenti A scores uses fairly subjective categories to calculate on overall score. These are wide ranging but can be answered subjectively and be open to bias.
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Quantitative models such as the Z score
Strengths
use publicly available financial data to predict whether a firm is likely to fail.
Calculation is easy to make using the model
Weaknesses
the calculation is only a probability not an absolute likelihood so it may need to be used with other data to make a more rounded assessment.
the model is based on historical trading patterns of a specific group of companies so a change in trading pattern or a company that falls outside the industry grouping used may find the model inaccurate.
companies in trouble may use creative accounting in calculating figures which means where these go into calculations they are unreliable.
Qualitative models such as Argenti A score
Rely on subjective scores to certain questions given by the investigator. A score above a certain level indicates potential disaste. The models attempt to fill in the gaps that quantitative models leave by using in-depth questionnaires but again these have their flaws. For isntance Argenti A scores uses fairly subjective categories to calculate on overall score. These are wide ranging but can be answered subjectively and be open to bias.
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Wednesday, June 22, 2011
Sources of Information for evaluation of financial stress faced by companies
There are a number of ways in which an assessment can be made of how likely a company may fail, some using qualitative and some quantitative information.
Identify FIVE (5) sources of information for evaluating the financial stress faced by companies.
(1) Analysis of the company accounts to identify problem relating to key ratios such as liquidity, debt cover and profitability.
(2) Other information in the published accounts, such as:
**very large increases in intangible fixed assets
**a worsening cash and cash equivalents position shown by the cash flow statement
**very large continent liabilities
**important post-balance sheet events
(3) Information in the chairman’s report and the directors’ report (including warnings, evasions. Changes in the composition of the board since last year)
(4) Information in the press (about the industry and the company or its competitors)
(5) Information about environmental or external matters such as changes in the market for the company’s products or services.
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Identify FIVE (5) sources of information for evaluating the financial stress faced by companies.
(1) Analysis of the company accounts to identify problem relating to key ratios such as liquidity, debt cover and profitability.
(2) Other information in the published accounts, such as:
**very large increases in intangible fixed assets
**a worsening cash and cash equivalents position shown by the cash flow statement
**very large continent liabilities
**important post-balance sheet events
(3) Information in the chairman’s report and the directors’ report (including warnings, evasions. Changes in the composition of the board since last year)
(4) Information in the press (about the industry and the company or its competitors)
(5) Information about environmental or external matters such as changes in the market for the company’s products or services.
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Impact of Corporate Failure
Discuss the impact of corporate failure on different stakeholders
As financial crisis hits businesses in the wider economy, there is a significant increase in the number of companies filing for insolvency. Corporate failure which leads to the collapse and closure of companies can have serious consequences for a number of different groups, such as:
Owners of companies which fail may lose their livelihood and even their homes and assets where these have been used as security for money invested in setting up business,
Investors in companies may lose substantial sums of money.
Creditors may not be paid for products and services. This can lead to difficulties for those companies as well.
Employees lose their jobs.
Entire communities can be adversely affected by the closure of important employers in the area.
The potential consequences of failure mean that concerned parties want to improve their success in identifying failing companies, in order to take steps to prevent the failure or to liquidate their investment before losing substantial sums of money. This has led to attempts to develop models which would enable the identification of companies likely to fail.
***********
As financial crisis hits businesses in the wider economy, there is a significant increase in the number of companies filing for insolvency. Corporate failure which leads to the collapse and closure of companies can have serious consequences for a number of different groups, such as:
Owners of companies which fail may lose their livelihood and even their homes and assets where these have been used as security for money invested in setting up business,
Investors in companies may lose substantial sums of money.
Creditors may not be paid for products and services. This can lead to difficulties for those companies as well.
Employees lose their jobs.
Entire communities can be adversely affected by the closure of important employers in the area.
The potential consequences of failure mean that concerned parties want to improve their success in identifying failing companies, in order to take steps to prevent the failure or to liquidate their investment before losing substantial sums of money. This has led to attempts to develop models which would enable the identification of companies likely to fail.
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