It’s a tough fact of life that businesses fail. Although start-up activity in America increased in 2015 according to the Kauffman Foundation, a large proportion of those are destined to fail. Research has found that over 36% will fail in their second year of operation, 44% in year 3 and more than 50% fail by the end of their fourth year in business. A quarter of new businesses fail after just one year.
The reasons for failure vary considerably, but a study that looked at over 14.4 million business closures between 2013 and 2014 found that 0.7% were the result of a lack of personal loans/credit, 1.3% were a result of a lack of business loans/credit, and 5.2% resulted from inadequate cash flow or sales. One of the most-cited (by 46%) reasons for business failure was “Incompetence”. Common problems include pricing emotionally or having insufficient knowledge of pricing, not paying taxes, improper planning, and possessing little or no knowledge of financing. Another reason is unbalanced experience or lack of managerial experience (30%), which results in business mistakes such as making poor decisions regarding granting credit or expanding too rapidly. Businesses in this category may also borrow inadequately.
Financial knowledge can assist new businesses from falling victim to these common reasons for failure. The ability to analyse financial ratios by vertical can prove useful when trying to access business loans and help business owners identify ways how they stack up against competitors. Being able to use an accurate interpretation of financial statements through financial data analysis can aid businesses in making decisions about expanding. According to the site Demonstrating Value, financial ratio analysis, whether it is the use of financial ratios by vertical or industry average financial ratios, helps companies to track trends over time and offers key indicators of organizational performance.