It is alleged that over half of new businesses are doomed to fail within their first year.
Of the 543,00 startups that are launched each month, only 25% reach the 15-year mark.
But based on concrete evidence from the Business Labor Statistics (BLS), this is not entirely true. Just 20% of these startups are likely to fail within the first year.
Nonetheless, you probably don’t want to end up in the 20% lot if you plan to start your venture. So in this post, we’ll be answering the question, “why do businesses fail?”
Why Do Businesses Fail?
Financial Hurdles
Based on the U.S Bank research, up to 82% of small businesses fail because they don’t know how to manage their cash flow.
In the beginning, most business owners are well aware of the amount of money they need to keep operations afloat. But as the revenue generated increases, it becomes difficult to keep tabs on income streams and expenses. This disconnect results in funding shortages, which, in the long run, causes these businesses to fail.
Failure to Investigate The Market
So you’ve always desired to start a bakery, and finally, have the financial capability to do so. However, before you put all your savings into this venture, examine the current market conditions.
Do you have an ideal location for your startup? Are there many competitors within that location? Most importantly, is it the right time to launch your business? Or, should you consider a different niche? Remember, it’s easier to sell products that fulfill an unmet need than to find customers for a product that you’ve invented.
Inadequate Business Planning
Why do businesses fail? Well, because they fail to plan adequately. This particularly applies to small business owners, who fail to realize just how vital it is to have a well-laid-out plan. At the very least, a business plan should include:
- A detailed description of the business
- Requirements of current and future employees and management
- Opportunities and threats in your relevant niche
- Capital needs; ought to incorporate projected cash flows.
A plan sets the pace for your business. Essentially, it enables you to focus on what is essential while helping you avoid pitfalls, such as mismanaging funds.
Neglecting Your Customers
It may seem trivial, but paying attention to your customers could mean the difference between succeeding and failing in your business.
Shauna Geraghty, who is the head of talent at TalkDesk, has explained this on its blog. According to Shauna, more than 90% of clients who are discontented with a business’ customer experience prefer to do away with that respective firm. Now, if you keep losing customers, there’s no doubt that your business is headed downhill.
Ineffective Leadership
If you’re a business owner, you should always remember that you are your company’s face. Your vendors, employees, and customers all look up to you as a reflection of your brand.
Now, while you don’t have to be perfect, there are a few leadership skills that you should have. For starters, you should have superb communication skills. This will help you interact effectively with all the parties relevant to your business.
You should also be transparent, know when to delegate, and be good at decision-making. Without these skills, your business has very little chance of being successful.
Premature Scaling
Don’t get me wrong; I have nothing against businesses that expand their operations. However, scaling too quickly, without proper research and planning, is a sure recipe for disaster.
Pets.com is a good case in point. The San-Francisco based company attempted a fast growth by opening stores nationwide. Sadly, they did not earn enough profits to sustain their operations, resulting in its death.
Overreliance on A Single Customer
For many startups, it’s sometimes seen as a necessity to gain that one big client. Getting that whale within the sea would probably enable you to sort out all your financial problems.
But, have you ever thought about the consequences you’d face if you lost that grand client. In the same way that they helped your business leap forward, they could also wreck your business in one sweep.
So the answer to the question- why do businesses fail- it’s simple. Simply, diversify your clientele base. Sure, having a big client is a plus. But don’t rely solely on them.
Having a Rigid Structure
Another reasonable answer to the question- why do businesses fail- entails being too rigid.
Once you’ve done the necessary research, developed your business structure, and acquired several customers, don’t become complacent. Chances are, the market gap that your product/service fills may not always be there.
As such, it’s advisable to keep track of the market and modify your business plan and operations as the need arises.
Failure to Have an Online Presence
Considering the digital transformation in the past couple of years, it makes sense to invest in online marketing platforms. Merely having a brick and mortar store just won’t cut it anymore.
Consider this: there are over 3.8 billion users active on social media. It means that having an online presence can increase your reach substantially. Brands that invest in websites and social media platforms gain quite a competitive edge.
Wrong Partnerships
Ah, a business love story. You’ve finally met that special partner who shares a similar vision for your brand. The type of person that has your company’s interests at heart! But can you truly trust them?
Partnerships, when done right, can help businesses succeed. However, if they don’t work out, they can result in massive financial losses, at best. At worst, they can put you out of business altogether.
How to Avoid Business Failure
Monitor Your Cash Flows
As mentioned earlier, a significant cause of startup fail is poor management of business finances. To avoid this, you should monitor your cash flows constantly, particularly your expenses.
Keep track of the revenue and profits that your business is earning as well as the expenditure. This way, you can ensure that your expenses never exceed your revenue; hence, you’ll stay afloat.
Avoid Unnecessary Debts
When faced with a financial hurdle, the most natural solution is to take a small business loan. While this is an effective way of meeting your short-term expenses, it’s also a risky affair.
To avoid business failure, ensure you repay your debts in time. Similarly, don’t take any unnecessary loans. This way, you can maximize on income-generating avenues such as expanding or hiring additional staff.
Have A Solid Business Plan
The minute you think of an excellent business idea, the next step should be formulating a plan. As you draft this document, ensure you cover all the bases. It should state your sales and marketing tactics as well as a solid contingency plan.
Customer Service is Key
Your customers are your best assets. A client who is pleased with your products/service will return for more, but they can also become brand ambassadors. They’ll mostly spread the right word about your business; hence, boost your brand’s awareness.
Wrap Up
Of the 543,00 startups that are launched each month, only 25% reach the 15-year mark. So why do businesses fail? Well, there are several reasons.
They include poor cash flow management, failure to create a business plan, and neglecting customers, just to mention a few.
