Are you scared of failing and losing your company? If YES, here are 7 chief causes of business failure and 15 effective countermeasures to prevent and overcome it.
For a lot of entrepreneurs, being optimistic about a business they want to delve into is just natural. Whether the entrepreneur has a new ground breaking idea, wants to improve on an already existing idea or just wants to startup a cliché like a grocery shop, there is always that faith that exists in them that their business will survive because truthfully, who wants to start a business that they know will fail?
However, when entrepreneurs start their business, they are faced with the harsh and cold reality of the business world. In fact, statistically, 21.2% of all businesses in the United State fail in their first year, 32.2% in their second year, 51.2% in their fifth year and 66.6% in their tenth year. This goes to show that there is just over 50 percent chance that a new business will fail in its first five years of starting to do business.
Why Do Businesses Fail?
When a business fails, it is usually very difficult to concretely assert that a single factor is responsible for the failure. A lot of times, business failure is as a result of many interconnected factors and not just a singularity. For example, the U.S Bank shows that 82% of small businesses fail as a result of cash flow management. Even though at face value, this statistic will ring true because cash flow is the life force of a business and without it every business will surely die.
However an in-depth analysis of that statistic may reveal that the cash flow management issue is an aftermath of a lot of other factors that led to the death of the business. This is because lack of cash to do business can be traced to a lot of other symptoms of business failure such as, a business going after the wrong market, an unmotivated, unqualified or inept team et al. All these factors can result in low sales, which will result to poor cash flow and ultimately business failure.
Success stories of businesses and entrepreneurs can be found almost everywhere while stories about failure are usually glossed over. This is mainly because human beings are uncomfortable with failure. But the truth still remains that there are more failures than success in business.
Persistence is usually what makes the difference. If your business fails, it does not mean that the owner of the business is a failure. Learn from the mistakes that made your business to fail, improve upon them and then try again. Here are a few of the major causes of business failure;
7 Chief Causes of Business Failure
a. Poor management and lack of adequate planning
Just as an architect must first create a blue print, an entrepreneur must have a plan. The key to business success in this development stage is to have a sound and well researched business plan. A drive around your community may reveal to you the revolving door syndrome of retail outlets closing down and a new venture starting after a few months.
Service industries are suffering the same fate. The usual suspect for these failures is usually lack of planning. No matter what ever business you would want to start, it will need to have a good manager at the helm of affairs. Good management encompasses everything such as customer service to running an efficient office.
b. Lack of cash flow and capital
Cash flow describes the flow of money in a business. Businesses are often started by people with very little money to invest in the startup and not enough to see the business through the first two fragile and critical years. Without enough capital investment, survival and growth of a business is very difficult.
Without money to purchase the necessary equipment, support, monthly over head or to spend on marketing to launch the business, the enterprise cannot start on a positive note. The average business is started with minimal capital that is often borrowed from families and friends, banks credit cards or high interest loans.
It is advisable to know where your financing will come from, the terms of repayment and if the business can afford to reply the debt. If you cannot afford to borrow then don’t. Rethink your business plan. A business should have a cash flow forecast so that it can know the amount of cash that is coming in and going out from the business.
Even though the forecast is only a projection it will help to give you an insight on what your financial future holds. Using the forecast, you can project likely sales and expenditure. You can also adopt other effectible cash flow management techniques such as sending out invoices on time, taking deposit payments in advance, paying bills on time and following up on late paying customers without delay.
c. Wrong location
With the competition from large businesses already being a threat to smaller businesses, location is key to a successful business. For instance, a hair salon business in an industrial area will most likely not do well. Despite simple logic, some people still go ahead to locate their businesses in impractical areas.
Some owners simply choose a location because of cheap rent. This is a very big mistake. Studies show that the average consumer will travel not more than three blocks out of their way especially if there is a closer alternative. No amount of advertising will entice customers to go so far away from their location if they can buy the same product conveniently elsewhere. Walk by traffic, visibility and parking are all vital to a retail location.
d. Inadequate marketing plan
A marketing plan is an integral part of a business plan, yet many people do not plan how they will market their new business. Some people just print fliers and put out advertisements on the local newspaper and then wait for the phone to ring.
Every business needs a structured marketing plan where you will get a marketing technique that is tailored down to suit your business. With a small and home based business, marketing is usually sited as the biggest hurdle faced by their owners.
e. Competition not researched
Many budding entrepreneurs delve into a particular niche of business without first analyzing the competition that already exists in that field. Take the time to properly research this aspect of your business. With the proliferation of home service businesses, knowing who and where your competition is can be time consuming.
Too many stores that are offering the same service within the same geographic area will definitely find it difficult to break even and thus offer profit draining specials to entice customers. Also consider the future, what will happen to your business if a large store selling your good or service for less money opened up a few blocks away?
There are no regulations that prohibit businesses that offer the same services from opening up near each other; you just have to determine when it’s not worth getting into.
f. Wrong choice of business
Be an expert in your field and love what you do. Starting a business because it seems like an easy way to make money is not wise. Review consumer economic long term trends and assess your business community. If you are buying into a business investment opportunity or purchasing an existing one, you will need an accountant to review the proposal.
Many unprofitable businesses have been positively presented through professional presentation, skilled wording and a good sales pitch. A professional portfolio often glosses over for the real reason that necessitated the sale of the business which is usually lack of profit. Some people think that they can take a business and do better than the last person. If it’s your first business purchase, then don’t just count on the thought that you can create miracles.
g. Business grows too quickly
This may seem weird but a quick and unanticipated growth of a business can spell its doom. If a business started with minimal cash flow, particularly one involving a large inventory, rapid growth can create all kinds of problems. Sudden growth may mean that your location is no longer suitable and moving a business is costly.
Additionally, inventory requirements, staffing, machinery upgrade et al. must be first paid for with profits. There is always delay between needing extra cash and eventual cash flow back into the business from sales. Sudden growth puts extra demand on your management’s abilities.
Any one of these aforementioned factors can cause a business to fail, but a combination of more than one of these factors can spell the doom of any business. Here are a few tips to help you avoid business failure and how to overcome it when it comes:
15 Counter Measures to Avoid Business Failure and Overcome If It Finally Comes
1. Identify the potential causes of business failure: no one likes to think of failure, but nonetheless, business failure statistics are quite high. One of the main tips that will help you to avoid business failure is to identify the various potential factors that have the ability to lead to business failure. When you have identified them, you can then set up adequate measures that will help you to forestall them from even happening in the first instance.
2. Failure is a thing of the mind: business failure will happen to a lot of people on their journey to success. Entrepreneurs have to realize that failure is in the mind. In the same way a predator that loses its prey does not stop hunting for other animals, an entrepreneur whose business fails should not just give up on business altogether. Entrepreneurs should be emotionally detached from the outcome of their results. Just like the predator, keep hunting!
3. Recognize the early warning signals of business failure: recognizing the early warning signs of failure before they precipitate into the real thing can help a business to prevent it before it comes. It is advisable to reward customers, suppliers and employees who identify situations that are worth fixing.
When you recognize these early warning signals, it is best to react immediately to prevent things from getting out of hand. It is important to have a plan in place for how your business will react to these signals.
4. Embrace it: even though failure may be a thing of the mind, it is still a very powerful thing. Being emotionally detached from failure is usually easier said than done. For most people, it is easier to ignore failure than to confront it.
However, one of the most important steps towards overcoming failure is to accept the emotional effects that come with it. Suppressing the pain you feel will only make issues worse than they already are. So, give yourself some time to feel disappointed but do not allow this feel to linger for weeks or months on end.
5. Find out why things went wrong: within every business failure lies a lesson to be learnt and thus an opportunity. By applying the lesson you have learnt from your business failure, there is a bigger probability that your later endeavors will succeed.
Try to critically evaluate and analyze your business to find out what you did wrong and the factors that led to its failure. You can try writing down your big failures. Discuss why the business failed and what you would have done differently if you had the chance.
6. Have a clear road map for the future: before you start any business, you should first have written down what your vision is for that enterprise. Use this vision to then create a business plan because it will give you clarity of purpose.
Be forward thinking and try to determine where you would want your company to be in the coming years. The goals set for your business however should not be unrealistic. In addition, the goals should be specific, measurable, achievable and relevant to your objectives.
7. Study failure stories: as an entrepreneur, you should have some successful individuals whom you admire a lot. Judging by how successful you perceive them to be, it is easy to just conclude that they always had things easy for them but at times, this is not the case.
Behind their stories of success lie a lot of inspirational stories about failure. Pick a few of your business role models and spend some time researching and getting to know their pasts better. An example is the story of Colonel Sanders, the founder of KFC (Kentucky Fried Chicken).
At 65 years of age he was retired and only had $105 to start a business. He traveled through many states in America seeking for sponsorship and funding but was turned down severally. Due to his positive mindset and the fact that he did not quit, he eventually met an investor who saw the worth of his business and thus KFC was born.
He eventually went on to sell KFC for 2 million dollars at the age of 74. Examining their stories will show you they are only human and that they have managed to overcome struggles that are even greater than the one you face now.
8. Carry out SWOT analysis frequently: a (Strength, Weaknesses, Opportunities and Threat) SWOT analysis is a study that is carried out by a business to determine its internal strength and weaknesses as well as its external opportunities and threats.
The aim of carrying out a SWOT analysis is to find out areas in your business that are working out and areas that are not. Strengths are good internal factors within the business, weaknesses are the damaging internal factors, opportunities come from external factors and represent good prospects for the future and threats are adverse external factors such as your competitors.
To prepare a SWOT analysis, you will first have to list out all the known strengths and weaknesses of your business. Then, make a mental projection of what you would like your business to look like in the future. Using the SWOT analysis, you can then design the goals you intend to accomplish and to also develop a plan of action.
Businesses should access their weaknesses on a regular basis before they are exposed and exploited by their competitors who are ever ready to take over their customers and market share.
9. Perseverance, determination and a positive mindset: starting up a business that eventually becomes successful is not an easy task. However, it is very possible to achieve business success. Be brave, strong and determined to succeed and refuse vehemently to become just another business failure statistics. In the event that your business fails, see it as a short term setback and seek help to find a solution to the problem.
Apple was once on the brink of bankruptcy but due to the perseverance of its founder Steve Jobs, the company has not only managed to pass through that difficult phase but to also become one of the most successful businesses in the United States.
10. Recognize the key role customers’ play: according to Gartner statistics, eighty percent of a company’s revenue comes from twenty percent of its customers. Without loyal customers, a business is bound to crumble and fall, therefore it is necessary to involve those loyal customers in your business strategies or when you are developing a new product or service. Consider their points of view and feedback and make them feel important (because they are).
11. Consider the financial impact of a divorce on your business: planning for contingencies such as divorce is definitely some of the things that people will prefer not to think about, but the truth still remains that divorce can not only have an emotional impact on you but can also wreck your business.
Funding the divorce proceedings can take a chunk out of your business. One of the ways you can mitigate the effect of a divorce on your business is to have a prenuptial agreement before getting married.
Also, you should educate yourself on how the law applies to your divorce case before taking any action. A divorce does not have to rob you of all the efforts you put into your business, therefore, it is advisable to seek the guidance of an experienced divorce attorney to help you through the process.
12. Have a mentor: a mentor is a person or a friend who guides a less experienced person by building trust and modeling positive behavior. You can draw from their wealth of experience and knowledge to help your business grow and prevent business failure. This is because they have been faced with several difficult situations and somehow they have managed to succeed.
Starting up a business can be quite scary but the encouragement, guidance and reassurance that a mentor gives can go a long way. According to a survey carried out by Sage, 93 percent of medium sized businesses credited their mentors for helping them succeed.
13. Take risks, but be sensible: the importance of taking risks in business cannot be over emphasized because stagnation is an enemy of progress. Even though the outcome of taking a risk is unknown, it should not be confused with gambling blindly without taking into consideration the stakes of the consequences that are involved in the risk. Refrain from taking risks when your emotions are running high. Be objective and discuss your plans with colleagues, friends or family.
14. Appraise your assets: do not disregard the power of the assets you may have amassed even if it’s something like an office space that you have leased or a great relationship that you have built. Consider the things that your business did well. It could be your employees, client relations or your intellectual property. Evaluate these assets, refine them and then be ready to put them to use again.
In conclusion, having a business that is failing doesn’t mean the final nail has been put on your business career. Be persistent in your approach to business and one day you will embrace success. You should also realize that failure is not the opposite of success, but a part of it.