Why do businesses fail?

There are many reasons why businesses struggle, and in some cases, ultimately fail. It happens for both Start Up businesses and established businesses. Here are some of the common causes.

Starting out in business

According to research more than half of new businesses don’t survive beyond 5 years. Here are some of the reasons for such high failure rates:

• An inability to build a profitable business model with proven revenue streams,
• Failure to create and communicate value propositions in a clear, concise and compelling way,
• No real differentiation in the market, which means competing on price,
• Emotional pricing – a lack of understanding of pricing strategy; reacting to gut feel and emotion rather than the facts,
• Not really in touch with customers and a lack of understanding of the market,
• Lack of business and strategic planning,
• Rapid expansion leading to ‘over-trading’ and running out of cash,
• A lack of systems, and
• Poor sales and marketing processes.

It doesn’t get any easier after 5 years… just a new set of problems.

The established business

Businesses that have been established for 5 or more years have typically gone through an initial high growth phase, but then they start to stagnate. Some of the common problems we find include:

• Constant cash flow issues due to the demands of high overheads and working capital needs,
• Slow growth – or even declining sales,
• Downward pressure on price and margins,
• The business owner working too hard, and
• Consistently falling short of profit targets.

Very often the biggest reason and the root cause of business problems is they don't understand the numbers and the business model. They don't understand the impact and importance price has. And it's not their fault... there is simply not enough opportunity to learn the necessary skills.

Let me introduce you to Eddie

Eddie runs a small business. He’s a videographer and creates professional videos for corporate customers. His business has annual sales of ￡850,000. It grew fast in the early days, but growth is slowing down. He hires in additional help as required on large projects, such as video editors, script writers, make-up artists and actors. His annual financial statements show that these costs – accountants call them variable or direct costs because they vary with sales – amount to 42% of sales. In addition, Eddie has fixed costs, such as the rent and rates on his studio and office, telephone bills and what he pays to his bookkeeper and other professionals. These total ￡460,000 which leaves him with a profit of ￡33,000.

Not much for all the crazy hours Eddie works! But then again, that’s not uncommon for business owners.

If you want to increase the profit of your business you must understand the numbers. For that reason, I am going to come back to Eddie in this series of blogs to show you the impact price can have on profit.

Let’s summarise Eddie’s business:

In the next blog, we’re going to explore how Eddie can improve his profits and make more money.

If you can't wait until then, download a free copy of my book 'The Entrepreneur's Guide to Transforming Profits through Price' at the link below where you can read Eddie's story and journey in full.

The Entrepreneur's Guide to Transforming Profits through Price

If you're local to Hampshire and interested in finding out how you can Transform your Profits, come along to our FREE event being held on the 27th November 2018 in conjunction with Natwest Bank. Details at the link below:

Until the next time..

Reza