12 Reasons Why Businesses Fail?

Entrepreneurship statistics often differ if you go through different sources. Some estimates claim that up to 95% of newly started businesses fail within first five years. Others say the number is around 65%. Either way, these are staggering figures aren’t they? However, in my 12+ years of experience with more than a hundred start-ups I’ve learnt lots of reasons why these figures of failure are so high. Let go through some of the basic ones today.

Reason 1: Inadequate Planning

As simple as it sounds, lack of forethought and inadequate planning is one of the main culprit behind every business failure.?Thankfully, 75% of most business ideas fail on paper and not in higher stages, which is exactly where a business idea should fail if it was meant to be. The only other option is a business to collapse on the street, perhaps under a pile of debt. Inadequate planning includes (but is not limited to), not completely understanding a product or service before putting it out to market, not conducting detailed market and labor research, not compiling a realistic profile for your customer, not researching your competition, not selecting a proper business model, not determining zero to all costs beforehand, or, in general, not doing enough preliminary work to determine if all the numbers add up for your business. In short, running a business with no well-researched plan is like hacking through a jungle without a map.

Reason 2: Underestimating the Commitment it Takes to Succeed

In a world where almost everything is needed on a silver platter the very moment it’s demanded, it’s very common to forget that quality and strength take time to acquire. For example, it can take up to six months or longer to put together a balanced business plan and as much as five to seven years or even longer to establish a solid customer base for it.?I’ll use the story of the photocopier to illustrate this point. The idea of photocopying text instead of making copies by hand on the paper was the brainchild of Chester Carlson, a visionary who developed his first successful machine-made ‘dry writing’ image in 1939.?Over the years Carlson offered his brilliant idea to over 20 companies including GE, IBM, and Kodak, yet each turned the invention down by saying that photocopiers weren’t needed because carbon paper was good enough for them. Much to his credit, Carlson persisted and eventually won over the president of a small photographic paper company (Joe Wilson) who agreed to fund the development of what he saw as a promising new idea that’ll bring a huge change in the market. Through thick and thin Mr. Wilson kept his word, faithfully supporting Carlson’s idea even when he could not afford to do so. At one point, during the winter of 1959-1960, a team of engineers worked nearly 24 hours a day, seven days a week to meet a deadline. With Wilson and Carlson unable to pay the heating bills, the men huddled around the prototype as they worked on it, wearing boots and coats (and with a blanket draped over themselves and the machine) in order to keep warm. The result was the launch of the Xerox, a company that reached $1-billion in sales faster than any other business in history up to then. It took over 20 years and brought several people to the brink of financial ruin, but the persistence, dedication - and a good idea - paid off.

Reason 3: Cash Flow Problems

Many entrepreneurs confuse the word ‘cash’ with the word ‘profit’, thinking that both are one and the same. ‘Profit’ is a word for accountants. ‘Cash’ is what a business needs to be fed on in order to survive. Banks, employees, and many suppliers must be paid in cash – not profit percentages. If customers take 30 days, 60 days, 90 days, or longer to make their payments, a business could be in trouble if it needs those payments to cover expenses. In my experience, one of the most difficult things to explain to wannabe entrepreneurs is that profitable businesses all too often end up going bust because of cash problems as much of the world runs on credit. Even a business with $30-million in sales can face bankruptcy if it can’t meet its payment obligations while waiting for its customers to pay for what they purchased. My suggestions for improving cash flow include:

? Avoid bad customers. Before accepting credit from anyone, ask and check their credit references. Some banks will do this for you. Or try a google search. In the UK, the Better Payment Practice Group (BPPG) names and shames 10,000 delinquent payment companies on its own website.

? Don’t go on a spending spree during the first year or two of your business operations. No matter how successful your business appears to you, or how enthusiastic you are to make more improvements, the first year of operations is not the best time to spend money. It’s the time for collecting the money. Avoid the temptation to celebrate early success or spend a lot of money during the first year or two of operations.

? Bill promptly. When possible, always ask for cash up front when selling your product/service.?Or else, set up a regular billing system, clearly state your pricing terms, or negotiate with customers for payment in advance.

? Create an incentive for receiving prompt payments.

? Reduce inventory. Determine the quantity of inventory that your business really needs and cut back on stock. Reducing the amount of money you spend on inventory frees up capital.

? Consolidate your loans. If you’ve taken loans money from several different sources, consider taking out one big loan that covers them all. It’s easier to keep track of your finances this way and this may involve stretching out your payments for another year or two.?

? Learn to barter. Sometimes products/services can be exchanged without money changing hands. First, reach out to some local entrepreneurs whose work you admire and see if they would be open to trading services with you. Once you've found someone, negotiate what services and goods will be exchanged, and agree upon a time frame for completing them.

Reason 4: Poor Management

Entrepreneurship is the death of management. Paradoxically, it’s also been said that management is the death of entrepreneurship. These comments refer to the belief that after setting up a new business, many entrepreneurs stiffen into rigid managers that are guided by routines - a business killing problem that probably arises due to the fact that most people don’t know actually what good management is all about. In short, management is not about just being a boss. Good management is about serving and providing for others, motivating employees, getting work done through others, and streamlining a business toward making the dream goals come true-- and that is just the beginning. Indeed, some practitioners believe that managers in denial of what’s going on in their business is the real number one reason why most businesses fail. Additional managerial problems include, an inability to inflexibility, delegate, abdicating important work responsibilities or micro-managing the work of others.

Reason 5: Not Understanding the Importance of Customers??

Setting up a new business involves a lot of work that makes it’s easy to forget about paying customers. Young companies are eager to get started, and it's easy for founders to get so caught up in their own vision that they overlook the significance of the buyer's voice.

Customer service has become absolutely central to any company's success. It's not like it's hard to do, either; all you have to do is think about what you'd want if you were the customer, then offer that to them! Do you want your favorite milkshake flavor at the ice cream parlor down the street? Do you want your chocolate chip cookies sooner than two hours after placing an order? Do you want your favorite band to play a concert at your house instead of going to a venue? Always keep a close connection with your customers and listen to their thought on your product or service. They are the one who will provide you the true feedback.

Reason 6: Staffing Problems

Staffing problems usually begin by:

(1) Failing to fully train employees,

?(2) Not fully investigating the background of job applicants,

?(3) Employing people who are clones of the entrepreneur rather than those whose skills will counterbalance the entrepreneur’s weaknesses.

(4) Hiring friends and relatives (in a long-term capacity).

No matter what the business, finding workers who are honest and share the owner’s commitment and passion can be time-consuming and an arduous process. To be sure, almost every small business has, at one time or another, been forced to hire the first breathing job applicant that appeared in the office. I will cover more on staffing problems in upcoming articles so make sure you subscribe to the Learn with Hamid newsletter on LinkedIn.

Reason 7: Poor Marketing and/or an Inability to Sell

Contrary to popular belief, if you build a better mousetrap the world will not beat a path to your door. Equally as true is that good products or services do not sell themselves. Simply put, the success of every enterprise depends mostly on its ability to sell – and an ability to sell begins by understanding the fundamentals of marketing, human psychology and promotion. Additional problems associated with poor marketing and selling include relying too much on one particular class of customers, not undergoing sales training, not focusing on a particular market segment, and ignoring the competition (every business is always competing against something – even if it’s just a customer’s time). To remain solvent, a business must be able to successfully:

? generate continuous interest and excitement in what is being sold,

? announce to potential customers what is being sold, and,?

? finalize a sale before a competitor takes it away. Don’t sell yourself short.?

Reason 8: Not Enough Capital.?

Many new business owners underestimate that how much money they really need. Not to get their business off the bottom, but to keep it running through the early years of operations when money is tight. That’s not to say that buckets of cash are needed to succeed as an entrepreneur. But keep this in mind that most businesses don’t make any money during their first year or two of operations. Funding is therefore needed to cover taxes, wages, raw materials and other costs, as well as the personal requirements of the owner (e.g.: food, medical insurance, a mortgage (or rent), car expenses, and so on). With this in mind, many successful entrepreneurs suggest pursuing several sources of finance rather than only one (which could dry up). If possible, they also suggest trying to collect an additional 3 to 6 months’ worth of additional?assets?to place?aside for emergencies. ‘If your business idea needs a lot of money to get started then you’re probably thinking too big,’ says one millionaire, ‘consider starting out smaller.’

Reason 9: Pricing Problems

The price of a product is usually the most significant factor affecting a customer’s decision as to whether or not the product will be bought. Equally as true is that a price contains the profit a business hopes to make. Learn more on pricing problems here .

Reason 10: Lack of a Competitive Edge

Many small businesses starts out as a cutout copy of another business, thereby providing no incentive for customers/clients to choose it over the available competition. Every enterprise should therefore have at least one aspect that makes it unique from its competitors.?For example, Domino’s Pizza, made its name by focusing on fast deliveries - something few other pizza parlors provided at that time. Dell Computer stays near, the top of its market by manufacturing a personalized product faster than any other computer company in the market.?How do businesses like these become unique – and how can yours? As said above, many small businesses copy each other you just need to find out a way to make your business unique and whether, your targeted audience will love or hate it. ??

Reason 11: Going through it Alone

Along with not doing enough research and not establishing a close relationship with your customers and suppliers, going it alone means relying completely on your own, infallible, all-knowing and superior intellect. Put another way, lots of qualified people, education centers, books, and government programs are available specifically to help entrepreneurs that it simply doesn’t make sense to venture into the marketplace alone. If help is needed it should be asked for. The economic strength of a nation is often reflected in the difficulty or ease with which a citizen can start a business. That’s why it can take thousands of dollars, hundreds of pages of forms, and more than a year of effort to register a business in many developing countries. Developed countries, on the other hand, make the process quite easier. So if you are starting up a business all on your own, know that, there is help whenever you need it.

Reason 12: Growing Too Fast

As odd as it may sound, having too many customers or clients can kill a business. Think of it this way: if a business is swamped with increasing numbers of customer orders it has to increase its output, which means that it has to purchase more raw materials, hire more personnel and buy more equipment. Meanwhile the business is stuck in producing the same output until it has the full ability to do more.

In other words, expenses soar while return on investment stays the same. This lack of incoming cash and increasing debt can result in big problems even for well established businesses – and not just financial ones.?When a business can’t deliver what it promises, the word of mouth spreads and customers quickly go elsewhere. Meaning, as your customer services drops the customers won’t even think about your product or service before leaving it. Research has shown that happy customers tell three to four people about their experience with a company while unhappy customers relay their disgruntlement to as many as 20 people! Now do the math for well established companies. It is therefore prudent for business operators to have an adequate plan that takes into account what will be done to increase output or expand operations before the business starts growing.

I hope this article help you in your entrepreneurial journey. Make sure you are subscribed to my newsletter . I publish daily content for entrepreneurs and startups.