More than 36 per cent (680,000) of registered companies in India have “closed” down as per the latest numbers provided by the ministry of corporate affairs (MCA) in Parliament. There are around 1.9 million companies registered with the government, the data shows.
While the percentage has moved up only marginally since 2017-18, it is a big jump from the 20 per cent share that closed companies occupied in earlier periods. In this blog we are going to tell you the the top reasons why private limited business get closed.
Business owners make difficult decisions all the time in business. One of the toughest decisions can be whether to close their company. Business owners often review their company to determine the sustainability of business operations. Accounting information plays an important role during this review process. Business owners use accounting to measure their company’s financial profitability and determine the long-term viability of their company. Several reasons can exist for closing a business. Each reason can affect the company’s operations in different ways.
Lack of Capital
A private limited business that runs out of working capital before bringing in sufficient funds to sustain its expenses is often a result of poor budgeting or unrealistic forecasts. When setting up the initial budget, the business owner might underestimate expenses, such as material costs, labor or utilities. The entrepreneur might assume the business will begin paying for itself long before it actually does, resulting in vanishing capital and mounting bills with no way to pay them. The University of Idaho's "Business Management and Technology Curriculum Guide" lists the lack of capitalization as one of the top four reasons a business fails. The other three include a lack of business skills, failure to understand the market and lack of advertising or publicity.
The inability to generate sufficient business profits is a common reason to close a company. Business owners spend money on inventory, production overhead and general business expenses when operating a company. Spending too much money in an attempt to generate revenues can result in low profits. Low profits mean that business owners are unable to receive a sufficient personal income. Business owners may also be unable to improve their company’s operations or repay external financing used to start the business. Rather than suffering through low and potentially negative profits, business owners may consider closing their company.
Another common reason small businesses fail involves the lack of business acumen held by a management team or business owner. In some instances, a business owner is the only senior-level personnel within a company, especially when a business is in its first year or two of operation. While a business owner may have the skills necessary to create and sell a viable product or service, he is often lacking the attributes of a strong manager and the time required to successfully manage other employees. Without a dedicated management team, a business owner has greater potential to mismanage certain aspects of the business, whether it is finances, hiring, or marketing.
Effective management and leadership skills are essential to business-building success, and a lack of either can lead to confusion and conflict within the ranks, poor morale and reduced productivity.
Make it a priority to acquire the skills needed to strengthen areas where you know you are weak.
The bottom line: Your employees look to you for leadership — so lead!
The entrepreneur might have an excellent business plan, ample capital, great management skills and be in perfect health, yet an unforeseen, totally unexpected event might close his business. A tornado might drop down in his town, demolishing his business location. An inventor in another state might develop something new that makes the business’ service or product obsolete. His main supplier might unexpectedly go out of business, making it difficult to meet production. Sometimes, it is impossible to predict an unforeseen event capable of closing a business.
Business owners often fail to prepare for the marketing needs of a company in terms of capital required, prospect reach, and accurate conversion ratio projections. When companies underestimate the total cost of early marketing campaigns, it is often difficult to secure financing or redirect capital from other business departments to make up for the shortfall. Because marketing is a crucial aspect of any early-stage business, it is necessary for companies to ensure they have established realistic budgets for current and future marketing needs. Similarly, having realistic projections in terms of target audience reach and sales conversion ratios is critical to marketing campaign success. Businesses that do not understand these aspects of sound marketing strategies are more likely to fail than companies that take the time necessary to create and implement cost-effective, successful campaigns.
Competition represents the number of companies in the economic market competing for consumers. Small businesses can face difficult competition when attempting to maintain sufficient market share. Business owners may close their business if competitors consistently produce more products at a cheaper consumer price. Business owners unable to compete with larger competitors can suffer from decreases in market share. Large competitors can also offer new products that the small business is unable to compete with.
Lack of proper planning is another common reason small companies fail and go out of business. All too often, entrepreneurs focused on achieving their dream of financial independence fail to take the painstaking but necessary step of creating a strategic business plan that factors in components such as workforce needs, analysis of competitors, sales and expense forecasts and marketing budgets.
One burgeoning entrepreneur, enthralled with the idea of becoming a salon owner, started her business without first conducting market research to see if the area could support such an endeavor. Try as she might, she was never able to build a customer base strong enough to keep her doors open.
To better ensure success, take whatever time you need to create an effective business plan. Many companies have software to make the job easier and faster. It doesn’t have to be reams of pages long — some companies even offer one-page plans. Regardless of length, planning is critics.
Unprofitable Business Model
Just because you have a business idea about which you’re excited doesn’t mean it’s a good one. That’s where creating a business plan, conducting marketing research and seeking the advice of others can be a lifesaver.
Also, it pays to ask yourself questions like: Is there a customer base for this product or service? Is there a proven revenue model? How long would it take to bring the business to market and at what cost?
Ignoring customer needs
Every private limited business will tell you that the customer is #1, but only a small percentage acts that way. Businesses that fail lose touch with their customers. Keep an eye on the trending values of your customers. Find out if they still love your products. Do they want new features? What are they saying? Are you listening? I once talked to the CEO of a training company who told me that they don’t respond to negative reviews because they are unimportant. What? Are you kidding me.
Above-mentioned reasons are one of the observed reasons of closing private limited. If you also want to close your private a company due to any reason, don’t worry, you can contact to Unilex Business Consultant who will help you regarding closing procedure Private Limited.