How Financial Mismanagement Is One Of The Key Reasons For Business Failure

financial management cause business failure company bankruptcy

Financial mismanagement is a wide-ranging term. It involves deliberate or unintentional neglect of financial matters that result in losses. It is the main reason for the failure of many businesses. 

Generally, the owner or shareholders of a company are not skilled in finance. They hire qualified and experienced people. These employees are responsible for handling the financial matters of the organization. If they are incompetent or negligent, they can mishandle the company's finances. The results are devastating for the company. It starts incurring losses that accumulate over time. 

Consecutive loss over a long period erodes the capital of the company. A time comes when its liabilities become more significant than its assets. The company goes bankrupt. 

Financial mismanagement comprises of several elements. We will discuss some of those in this article. We will also examine how a business can manage its finances in a much better way. 

Ineffective Management Of Cash Flow 

Cash flow serves as the lifeline of any business. Every business runs on cash. You need it for daily operations, utility payments, payroll, and procurement of raw material. 

Daily operations will suffer if ample cash is not available with the business. Skilled and adept cash management is necessary for making sure that there is never any shortage. 

It is the core job of the financial management team to make sure that it handles every cash-related aspect of the business in the most professional manner. The activities should not impair the efficiency of the company in any way. 

Stocks 

Stocks are part and parcel of business. There are two kinds of inventory: raw material and finished goods. 

Raw material stock consists of all those items needed for preparing finished goods. Finished goods stocks comprise of things that are ready for delivery. 

There is a time-lapse between the purchase of raw material and the sale of finished goods. During this time, the company's cash remains stuck either in the processor in the market. 

Proper cash management requires the finance team to buy only as much stock as is necessary at any given time. An imbalance always results in cash distress. 

Inefficient Credit Practices 

Usually, the company sells its good against cash. However, in some cases, it allows a certain grace period to make the payment. It is a credit sale. 

A credit sale is a common practice in the market. However, if the credit team is inefficient, there is no follow-up with the client. Consequently, payment delays occur. Hence, it always results in scarce cash flow. 

Lack Of Planning For Expenditures 

Expenditures are part of doing business. No business can operate without incurring its usual spending. However, some expenses are unforeseen. Moreover, there are expenditures of capital nature as well. For example, the management decides to expand its office space. It will cost a lot of money. Moreover, purchasing new machinery, cars or furniture also costs money. 

The finance management team must plan these expenditures. It must also adjust its cash flows to arrange the required amount of money for these expenses. 

Amateurish Accounting 

Accounting is a specialized field. If the accounting team does not have the experience, it will provide faulty and inaccurate reports to the management. Based on these reports, the administration will make decisions that will become disastrous for the company. 

During business, the owner or the shareholder cannot possibly understand whether his company is making profits or incurring losses. The accountant is the person who lets them know the exact numbers. These numbers represent the financial health of an organization. 

In the absence of a professional accounting team, the organization will resemble a ship without a captain. It has no direction and no sense of purpose. Eventually, this ship will sink. It will take down the owner's investment with it. 

Scant Projections 

Financial management is not merely about making accounting entries and presenting reports to the administration. It also involves analyzing historical data and developing projections for the future. 

Adequate and accurate projections are necessary for a going concern. These projections offer a bird's eye view to the management regarding how their company will perform in the coming days. 

Projections also allow adjustments in future spending patterns and seeking growth opportunities. If finance management is unable to furnish proper predictions, the company will miss growth prospects. Expenses will go out of control, and the company will go down with a crash. 

Non-Performing Loans 

Every company offers loans to its customers. It is not a cash loan but a credit line. When a customer fails to discharge this credit on time, it becomes a non- performing loan (NPL). The finance management team keeps an eye on such NPLs. There is always a possibility that an NPL will convert into bad debt. It means that the customer will stop paying back the credit. An increase in NPLs is a disaster for any kind of business. 

Bad Debts 

Bad debts can always eat the profits of a company faster than a monster. It occurs when a client who owes your payment refuses to pay back or goes bankrupt. In such a situation, the company loses its revenue. It also losses the value in terms of stock and time used for producing the goods. 

The larger the bad debts, the more it hurts the company. Financial management requires looking out for bad debts and stop them from happening. 

Firstly, stay away from those clients that are financially unstable. The finance team analyzes its books of accounts for this purpose. The team consults market news and adverse media before onboarding a new credit customer. It is necessary to save the company's reputation. 

Conclusion 

A business is a profit-making organization that adds value to the shareholders' capital. It is possible only if it continues to make reasonable profits year after year. If a company is not making profits, there will be no point in running it. 

Lack of profits eventually results in business failure. Many businesses take off ideally but fail to make it to their third year. The reason, in most cases, is financial mismanagement. The owner of the company does not know that his company is incurring losses until it is too late. Finance is the backbone of any business. Mismanagement in this field can result in failure and loss of the entire company.

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