Updated: Jan 27, 2022
By Tsu-Li Liew
Closing a business is always a tough decision for any owner to make. After all, it is a venture he or she built over time with hard work and passion. However, it is important for a business owner to recognize when it is time to pull the plug. While it is sad to close a business, sometimes it is the only solution that will shield a business owner from further debts or liabilities. A business owner needs to be able to recognize when is the best time to leave a venture behind. Below are the top four most common reasons why a business owner would choose to close a business.
Reason #1 – High Costs, Low Revenue
Making money is one of the many reasons why someone would choose to open a business. After all, money makes the world go around, and the same principle applies to a business. The business needs to have a steady income in order to keep operating. However, it is not easy to make money and the lack thereof introduces many problems for a small business. Low profits can be a sign to a business owner that he or she should close the business. According to the Washington Post, over 100,000 small businesses have permanently shut down since the wake of the COVID-19 pandemic, and the numbers continue to rise. Many of them were unable to survive weeks of generating no income. Even operating at half-capacity proved to be a struggle. After all, if the business is barely breaking even or, even worse, not making enough, the costs then become greater than the revenue.
Costs, such as rent or employee pay, are overhead costs that occur monthly. A business owner will have to keep paying them, even if the business is not making money. This can quickly put a business in the red because the business will not have enough capital to pay these costs. A business owner will either have to use their personal credit cards or take out a loan to pay them. If an owner takes out personal loans, he or she will be on the hook for them later on, even if the business is closed. At this point, a business owner needs to decide whether to close the business and start anew, instead of accumulating more debt and hoping that the business will take off eventually.
Reason #2 – Mismanagement
Another problem that causes businesses to close down is the lack of good management. As the Chron explains, there are a number of ways mismanagement will hurt a business. This could then cause financial issues to spiral out of control. Bad management mainly shows up in two ways: 1) not supervising employees well, and 2) not balancing the company’s budget well. This can cause low morale between employees, less productivity, and decreased business, which could then even lead to business failure. If an owner recognizes that these management issues are prevalent in the business, they will need to address it or could consider closing the business.
If a business owner or a supervisor does not manage their employees well, low morale amongst the employees could lead to less motivation to do their work properly or them quitting altogether. Less motivation might affect the quality and quantity of work that these employees create for the business, which can then decrease the quality of the business itself. Employees quitting is also a serious problem because the business owners will have to spend time hiring new people and training them for the job.
Without a good plan that sets the standard that is expected of employees, the business might also see a decrease in productivity. 15five presents the importance of giving feedback to employees and how it can increase productivity and trust. Without guidance, employees might be left wondering whether their work is good enough or whether they are meeting expectations, which might distract them from being productive or improving their work. This could lead to employees not focusing on their job and instead preparing to leave the business to seek employment elsewhere. As mentioned above, re-hiring and training new employees cost money and time that could be spent on other costs.
Another big issue with mismanagement that causes businesses to close is the failure to balance the business’ budget. It can happen when a business owner does not set realistic projections for what the business should earn, or the business expenses end up being much higher than what was expected. If any of these two scenarios happen, the business will not meet its quota. It will then impact its growth because the owner ends up losing money instead of making it. The owner may then have to make the tough decision to close down the business before it loses more money.
Budget mismanagement can also happen when an owner blurs the line between personal and business expenses. There are many reasons for a business owner to keep his or her business and personal finances separated, such as filing taxes or preparing documentation for selling the business. Here is a guide from American Express on tips on how to separate the finances. However, it might still be tempting for a business owner to take money from the business for personal use, since any money surplus belongs to him or her. It becomes a huge problem if the owner makes a habit out of using and continuously depleting the business fund. If the business runs out of money and is piling on debt, the owner might be forced to close it down again.
Reason #3 – Market Whims
Sometimes the reason why an owner closes his or her business down is because they could not adapt fast enough to the market or did not know their market well enough. The COVID-19 pandemic may have brought these issues into the open. Business owners who were unable to adapt their business model to offer online sales or delivery may now be faced with the possibility of closing their business because of the lack of income. While certain businesses are booming due to high demand for certain products, such as masks and household cleaning supplies, businesses that provide non-essential goods and services, such as music venues and others, are suffering because there is no business. COVID-19 is a special case, but these are issues that business owners faced even before the pandemic.
If an owner does not adapt his or her business to the market, then the market will move on. This means that for businesses who are unable to attract or keep customer interest in the product or service, customers would flock to another business instead. The shift in market can be caused by many factors, such as technology. One example is how Netflix eventually caused Blockbuster to close its businesses. Forbes highlights how Blockbuster was reluctant to change its ways, while Netflix was changing the way movie rentals worked through an online rental platform. Another example of technology shifting the market is Uber and Lyft’s entry into taxi services. If an owner is unable to adapt to the ever-changing market and loses money, it might be a sign to close the business.
Sometimes the business owner is in the right market at the right time, but there are many other businesses offering the same goods or services. When the market becomes oversaturated with the same type of stores, competition is very high. A business owner would either have to offer a better product than the rest or change the price to as low as possible. The inability to do either could cause the business to be less popular and not generate enough revenue to keep going. Small business owners are at a disadvantage in this case because large corporations have the funds to develop a better version of the product or set the price lower.
Another reason the owner may choose to close his or her business is because there is no consumer interest in the product at all. The Balance Small Business lists 5 reasons why customers might not be interested in the product. The reasons include customers not being aware of the product or its value, as well as the product being unnecessary or inaccessible. Without customers or sales, there will not be any revenue for the business. It might be hard for a business owner to admit that the product is not resonating well with the consuming public. Since he or she created and developed it, the owner might have developed an emotional attachment to the product. There are times when it takes more time for a new business to start getting a steady stream of revenue going, and later take off. However, if the business continues to have no steady income, then the owner should look to close down and start anew with a different product.
Reason #4 – Health Issues
Running a business takes a lot of hard work and passion. Therefore, it is important for a business owner to be both physically and mentally healthy. If an owner’s health declines for any reason, it might be a sign to close the business as well. Assuming the owner manages the day-to-day operation of a business, failing health might mean that the owner will be away most of the time and unable to tend to the business. Unless the employees are capable of running the business without the owner, time away from the business could mean decreased revenue. However, sometimes the stress from running the business is a factor that impacts the owner’s health and can cause the business’ downfall. The signs of stress can include gaining or losing weight, constantly being tired, and anxiety. Forbes has a great list of how to reduce business related stress. In either case, the owner should consider whether running the business is worth the strain on their health or whether it is better to close the business now.
Not only is good physical health important, but good mental health is vital to running a business as well. An interview in Forbes addresses the importance of good mental health for business owners. After all, running a business requires a lot of dedication to it. If an owner has lost his or her passion and dreads running the business, it may be a sign that he or she should close the business instead. Otherwise, it can cause many problems that could eventually lead to a failing business, which could put more stress on the owner. Without the drive to run or grow the business, the owner might not be motivated, which could decrease productivity and cause low morale among their employees. Similar to problems stemming from mismanagement, decreased productivity could mean less revenue, and low morale could drive employees to seek another job elsewhere. A business owner might have to reconfirm why they started the business in the first place and whether they still believe in that reason. If the owner forgot the reason why they started the business in the first place, he or she would most likely close it, as managing it has become a chore instead.
Having to make the decision to close a business is hard, but sometimes necessary. After all, it is better to stop a business earlier than waiting too long and causing problems to grow. While some failures could have been avoided, some are dependent on the market and the economy. It is important to remember that failure is also a learning experience, and that there is always a chance to start another business.
Are you interested in launching or sustaining a pandemic proof small business? Spot issues, take action, stay safe, and thrive in a post Covid-19 world with Legalucy.
Your interaction with Legalucy and mypandemicproofbusiness.com does not create an attorney client relationship. We provide information for your reference only. Such information should not and cannot be construed as legal advice. For more information, please contact firstname.lastname@example.org.