Common Causes for Business Loss

Last updated : December 17th, 2019 03:43 pm

Common Causes for Business Loss

MSME businesses play an important role in the socio economic growth of India and provides employment to millions of skilled, semi-skilled and unskilled labor employed in the sector. However, MSME businesses are also prone to losses due to various reasons, leading to closure of the business. In this article, we look at some of the most common causes of business loss in MSME businesses.

Top Reasons for Business Loss

1. Poor utilization of assets, unproductive working capital management lack of costing and pricing, absence of planning and budgeting, unsuitable utilization or diversion of funds and weak equity base.
2. Incorrect selection of site related to production, unsuitable plant and machinery, bad maintenance of plant and machinery and so on.
3. Wrong demand forecasting, unsuitable choice of in product mix, deficiency of product planning, incorrect market research methods and bad sales promotions.
4. Bad wages and salary administration, bad labor relations, deficiency of behavioural approach leads to dissatisfaction among labor.
5. Inappropriate planning, deficiency of integrity in managers, lack of coordination and control.
6. Shortage of skilled labor.
7. Losses due to liberal licensing policies, control of purchase by bulk purchasers, changes in global marketing scenario, and extreme tax policies by government as well as market recession.
8. Production constraints like lack of raw material, shortage of power, fuel and high prices, import-export restrictions.
9. Financial factors related to credit restrains policy, postponement in disbursement of loan by banks, adverse investments, bad credit, etc.
10. Lack of finance and ability to fund raise.

How to Prevent Business Loss

1. Ensure there is a business plan in place along with a monthly cash flow forecasting.
2. Prior to major capital expenditure, ensure that consultants pertaining to the subject matter are consulted and all assumptions are conservative.
3. Ensure that any plan or forecasting is routinely updated and compared against actuals.
4. Improve employee satisfaction and benefits over time, commensurate with their performance.
5. Ensure there is proper internal controls in the organisation to prevent theft or fraud on the business.
6. Ensure that the HR function is strong with special emphasis on recruitment and training of manpower.
7. Ensure that all purchases are made based on multiple quotes obtained from different vendors.
8. Ensure that the business has sufficient stock of inventory, raw material, etc., in case of non-availability.
9. Ensure that finance is planned well in advance and any fund raise exercise is started atleast 6 months ahead of time.

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