Common Reasons Businesses Fail
It’s difficult to run a business and it’s even more difficult to run a business successfully. This fact is borne out by statistics provided by the Small Business Administration (SBA). About a third of small businesses fail in the first two years, around half of them close down after five years, and only a third last ten years or longer. While industries and business types differ, there are common reasons businesses fail, the most prevalent being lack of funds, poor management, a poor business model, and inadequate marketing efforts.
Let’s take a look at some of the more common reasons businesses fail.
First and foremost, it takes financial skill to run a business successfully. All too often, a person starts a business with the idea to be their own boss and make money doing their own thing, but lacking fundamental financial skills. Wanting to run a business isn’t enough. If you start a business without the skills to handle cash flow, payroll, expenses, taxes, billings, and other financial tasks, your venture is bound to fail. A business owner must know where every dollar comes from and goes to.
A second reason related to finance is the incorrect pricing of products and services. In order to be competitive, some business owners cut their prices so low that the business can’t be profitable. While this may help entice more people to buy, it may not be effective if prices are kept low for too long.
Many businesses also fail because no contingency plans are in place for unforeseen events. Unforeseen events can have a devastating impact on a business. Business owners must have a contingency plan in place to minimize risks. Things that could go wrong include a major client that doesn’t pay, a fire, or a natural disaster.
Many businesses fail due to a lack of management skills. Businesses struggle if the owner doesn’t have enough experience to take charge and make operational, financial, and management decisions.
An overall lack of business acumen is a common reason for business failure, whether residing with the business owner or the entire management team.
Especially in the first few years when the business owner is just starting out, the lack of business experience is a real risk. The person starting the company may have the skills to develop a new product or service, but may not have the skills to turn that achievement into a successful business.
To succeed and grow a business needs a dedicated management team experienced in finance, staffing, sales, and marketing.
Lack of business planning
It’s critical not to start a business without a business plan. Many small businesses fail because they don’t have a sound business plan or lack one altogether. For instance, drafting a business plan forces you to think about how your business will make money. Hopefully, if your idea is unrealistic, you’ll realize it before you commit to a venture that is destined to fail.
The basics of a business plan should include:
- A description of the business
- A revenue plan
- Staffing needs
- Capital needs
- Marketing plans
- Competitor analysis
- Analysis of opportunities and threats within the broader market
Business owners who fail to draw up a well-thought-out business plan, set themselves up for failure. Businesses that have a business plan, but don’t regularly review it and make adjustments when needed, also face a rough ride.
Products and services that are not marketed don’t sell. If your target audience doesn’t know about you, you have already failed.
In order to run a successful small business, a business must devote up to 8% of its gross revenue to marketing purposes, according to the U.S. Small Business Administration.
Because marketing is a crucial aspect of any business, business leaders must ensure that they establish a realistic budget for their marketing needs. Business success depends on sound marketing strategies, an in-depth understanding of the importance of target audience reach, lead generation, and sales conversion ratios. Along with an adequate marketing budget.
Lack of market research
Lack of thorough market research is another reason for business failure. You can’t deliver a winning product or service if you failed to do your market research. Market research will reveal if your product or service is viable before you open your business. Conducting market research will also give you an insight into what is trending in the industry, what consumers want to buy, and why.
It’s not good enough to come up with something unique – if people don’t want it, you are wasting your time. It is smarter to anticipate what consumers will need and to provide that to them in ways that exceed their expectations.
Also, market research should tell you what your target market is looking for and what they are willing to spend to get it.
Importantly, your market research will also help you to learn about your competition and what you can do to outmaneuver them.
No online presence
In 2022 every business must have a website and a social media presence. Think about it – if your business sells shoes and you only have a physical store, your audience is the people walking past your door. The business next door that has a website, shares those customers with you, but it also has thousands of potential customers visiting its website.
Websites reside on the internet and that is where consumers spend a lot of their time, so if your business doesn’t have a website, you miss out on potential business.
At the very least, your business should have a professionally-designed website where potential customers can find your business and find out what it offers. If you enable your website for eCommerce, so much the better. In that case, your customers can order directly from your online store.
Bottom line: if you don’t have a website, you miss out on countless opportunities.
Underestimating the power of social media
More than half of the world’s population uses social media platforms like Facebook, Instagram, and Twitter. These platforms are where consumers discover new products and services. If your business is not there, you can’t be discovered.
Social media enables businesses to build human connections with their existing and potential customers. Companies can use social media to introduce their followers on the various platforms to the people working at the company.
Companies that don’t have a social media presence miss out on the opportunity to build a community that shares how they use the company’s products and how they benefit from them. Interactions on social media help companies stay in touch with customers and understand what they need through the feedback they provide. Companies that don’t stay in touch with customer needs can’t be competitive enough to succeed in today’s business climate.
Expanding too fast
Business failure sometimes occurs when a business owner is too focused on expanding the business as fast as possible instead of focusing on slow and steady growth. With too fast expansion, a new company may get inundated with orders that it can’t fulfill. This can lead to a bad business reputation and failure.
Too much growth too fast can be just as bad as no growth. One of the consequences is shrinking profitability, which spells disaster for a company.
When demand increases exponentially, profits may actually shrink as the cost of meeting increased demand starts to affect your cash flow. To meet demand you may need to pay staff to work overtime or employ more people, or you may have to stock more inventory, all of which will increase your costs. You may end up borrowing money to keep going. If something unforeseen happens, like an increase in supplier services costs, it may be the straw that breaks the camel’s back.
The wrong location
If your business relies on location for foot traffic, the wrong location can be disastrous. Or, if your business requires a professional location for consultation with clients, a good business location in the right neighborhood is a must-have.
When choosing where to situate your business, consider:
- Safety of the area and the building
- Kinds of businesses in the area
- Where your customers live and work
- Location of competitors
- Proximity to warehouses
Dependence on a few big customers
While it is always good to foster good business relationships with your biggest customers, relying too heavily on them for your business can be disastrous. In fact, depending too much on a few big customers can result in business failure if one of them suddenly withdraws and no longer does business with you. Both your cash flow and your profit will take a knock.
You may want to offer this customer discounts to keep doing business with you, but in the long run, this strategy may also hurt your business. The best is to avoid this risk by building a broad customer base right from the start and making sure that your contracts include reasonable notice periods.
Poor cash flow management
Poor cash flow management can cause the demise of any business. Cash flow problems arise when cash outflow outstrips cash inflow. This can be caused by decreasing sales, poor debt collection, too much inventory, bad debt, and overdue invoicing.
Indeed, even a profitable business can fall victim to a crippling cash flow crisis, which is often caused by the ineffective management of debtors, high stock levels, bad debt, and late invoicing. Declining sales, slow-moving inventory, and uncollected debt hurt the bottom line and inhibit growth.
If this carries on too long, the business won’t be able to settle bills and repay debts, which can spell the end of the firm.
Not hiring the right people
The people that work for a company have a massive effect on every area of the business. In case of a bad hire, it can have far-reaching consequences. For a small business, it can have a devastating financial impact, and even mean the end of the business if clients start leaving.
For instance, if you employ an ineffective sales team, you won’t have enough sales, which will impact your income. The net result is that you won’t be able to meet your financial obligations, which spells disaster for the company.
From finance to human resources and operations, the wrong people, especially in key positions, can sabotage a business and lead to its downfall.
Losing touch with customer needs
Even if you have a stunning product, if you don’t keep up with your customers’ evolving needs, your business will fail. It’s vitally important to stay on top of your buyers’ needs. You can find out about your customer needs by monitoring and responding to comments on your social media business pages, customer feedback surveys, and interviewing your customers. If you fail to do this, you will not understand what your customers need from you, so you will be unable to provide it. Once that happens, you risk business failure because customers may abandon your brand. And if enough of them leave, you won’t have a viable business anymore.
Business owners can avoid this situation by doing market research to stay abreast of developments and changing attitudes and needs among consumers. Using customer relationship management (CRM) tools may be helpful and forestall business failure. Even if the business survives, the effect of poor customer experience can be detrimental to the company for many years due to loss of reputation.
Running your own business is an exciting prospect but it’s not a decision to be taken on a whim. If you are serious about having a business that you can be proud of and that will support you and your family, you must put a lot of thought and planning into it. Articles like this one should alert you to possible pitfalls that you can do your best to avoid to ensure your success.
If you find yourself already struggling, be sure to check out our other blog on how to overcome business failure.