November 28, 2022

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Surprising Reasons why many Startups Collapse

Surprising Reasons why many Startups Collapse

Technological causes

If within an industry, there is failure to exploit information technology and new production technology, the firm can face serious problems and ultimately fail. By using new technology, cost of production can be reduced and if an organization continues to use old technology and its competitors start using the new technology, this can be detrimental to that organization. Due to high cost of production, it will have to sell its products at higher prices than its competitors and this will consequently reduce its sales and the organization can get into serious problems.

Working capital problems

Businesses which rely on one large customer or a few major customers can face severe problems and this can be detrimental to the business. Losing such a customer can cause big problems and have a negative impact on cash flows of the businesses. Besides, if such a customer becomes bankrupt, the situation can even become worse, as the firms would not be able to recover these debts.

Economic distress

A turndown in the economy can lead to corporate failures across a number of businesses. The level of activity will be reduced thus affecting negatively the performance of firms in several industries. This cannot be avoided by most businesses.

Mismanagement

Inadequate internal management control or lack of managerial skills and experience is the cause of the majority of company failures. Some managers may lack strategic capability required to recognize strengths, weaknesses, opportunities and threats of a given business environment.

Over-expansion and diversification

The situation of over-expansion may arise to the point that little focus is given to the core business which can be harmful as the business may become fragmented and unfocused. In addition, the companies may not understand the new business field.

Fraud by management

Management fraud is another factor responsible for corporate collapse. Corrupt managers may be influenced by personal greed. They manipulate financial statements and accounting reports. Managers are only interested in their pay cheques and would make large increases in executive pay despite the fact that the company is facing poor financial situations. Dishonest managers will attempt to tamper and falsify business records in order to fool shareholders about the true financial situation of the company. These fraudulent acts or misconduct could indicate a serious lack of control leading to serious consequences such as loss of revenue, damage to credibility of the company, increase in operating expenses and decreases in operational efficiency.

Poorly structured board

Board of directors may be handpicked by CEO to be docile and they are encouraged by executive pay and generous benefits. These directors often lack the necessary competence and may not control business matters properly. These directors are often intimidated by dominant CEOs and do not have any say in decision making.

The dominant CEO

A weak board will often, after a period of seemingly successful management, effectively abdicate power to a CEO whose drive, charisma and ruthlessness may have contributed to the earlier success. Lulled into a false sense of security by rising share prices and earnings, the board becomes reluctant to challenge the CEO’s judgment and falls into the habit of rubber-stamping his decisions. It stops scrutinizing detailed performance indicators, allows executive compensation to spin out of control and becomes content to an extent of even accepting management figures and explanation without serious question. This may lead to eventual failure.  


 

 

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