Some estimates claim that up to 95% of new businesses fail within five years. Others say the number is around 65%. Either way, these are staggering figures when one takes into account that most new businesses fail for more or less the same reasons. Most of these reasons are presented below ranked in the order of the threat they pose according to the entrepreneurs surveyed for this book. Note, however, that those placed at the end of the list are not the least dangerous. ‘Any one of them, combined with another or on its own, carries enough firepower to bring down a business,’ says the owner and operator of ASAP UK Ltd. (a sign making and print shop in Southampton, England). It therefore makes sense to do as much as possible to avoid all of them.
Reason 1: Inadequate Planning
As simple as it sounds, lack of forethought and planning is the main culprit behind virtually every business failure. Thankfully, 75% of most business ideas fail on paper (i.e.: the planning stage), which is exactly where a business idea should fail. The only other option is to collapse on the street, perhaps under a pile of debt. Inadequate planning includes (but is not limited to), not fully understanding a product or service before selling it, not conducting detailed market or labor research, not compiling a realistic customer profile, not researching the competition, not selecting a proper business model, not determining all costs beforehand, or, in general, not doing enough preliminary work to determine if all the numbers add up. In short, running a business without a 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 wanted on a silver platter the moment it’s demanded, it’s easy 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 business plan and as much as five to seven years (or longer) to establish a solid customer base. I’ll use the story of the photocopier to illustrate this point. The idea of photocopying text instead of making copies by hand 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 idea to over 20 companies including GE, IBM, and Kodak, yet each turned the invention down by explaining that photocopiers weren’t needed because carbon paper was good enough. Much to his credit, Carlson persisted – eventually winning 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
Reason 3: Cash Flow Problems
If passion, commitment, and planning are more important than money, then why do cash flow problems appear at the top of a ‘reasons why business fail’ list? Think of it this way: money isn’t needed to conceive a baby, but once a baby is born it needs to be fed – and the bigger a baby gets the more food it needs. So it is with a business. Too many entrepreneurs confuse the word cash with the word profit, thinking that they’re one and the same. ‘Profit’ is a word for accountants. ‘Cash’ is what a business feeds on in order to survive. Employees, banks, 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. One of the most difficult things to explain to wannabe entrepreneurs is that profitable businesses all too often end up going bust due to cash problems because much of the world runs on credit.
Reason 4: Poor Management
Entrepreneurship is the death of management. Paradoxically, it’s also been said that management is the death of entrepreneurship. What these comments refer to is the belief that after setting up a business too many entrepreneurs stiffen into rigid managers that are guided by routines – a problem that probably arises due to the fact that most people don’t know what good management is about. In short, management is not about being a boss. Good management is about serving others: providing for others, motivating people, getting work done through others, and streamlining a business toward making a sale — and that’s 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.
Reason 5: Not Understanding the Importance of Customers
Setting up a new business involves so much work that it’s easy to forget about paying customers. Interior design, bookkeeping, product displays and other non-revenue producing activities – although important – should not be the priority of a business. Successful business operations are reliant upon receiving money from satisfied customers on a regular basis. Yet no matter how simple this concept sounds, it’s surprising how many businesses lose sight of it. For example, years ago a wealthy doctor wanted to purchase industrial-size washing machines and dryers for the hospitals he owned.
What is it that causes people to lose sight of the fact that to make money and survive a business must focus on its customers?
Reason 6: Staffing Problems
People problems usually begin by:
- not fully investigating the background of job applicants,
- failing to fully train employees,
- hiring friends and relatives (in a long-term capacity), and
- employing people who are clones of the entrepreneur rather than those whose skills will counterbalance the entrepreneur’s weaknesses.
No matter what the business, finding honest workers who share the owner’s passion and commitment can be an arduous and time-consuming 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 doorway. That being said, it is possible to entice capable people into joining an organization because it, or the person behind it, impresses them. Don’t be the type of boss whose behavior resulted in a prospective employee leaving his or her last job (‘Though we are supposedly living in a democracy, most of us spend our lives working in private tyrannies,’ says business writer John Emerson). As an entrepreneur, you may not be able to pay your employees more than your competitors, but you can certainly give them more.
Reason 7: Inflexibility
Small businesses should not act like rigid, inflexible corporations. From the business plan to the marketing campaign to the importance of finalizing a sale, if something isn’t right it should be changed quickly. Change can happen in one of two ways: it can either be done by you or it can be used to run over you. Keep in mind the definition of insanity (the constant repetition of a behavior with the expectation of a different result) and the perils of inflexibility become more obvious. Persistence is an admirable trait, but when it turns into stubbornness it can lead to trouble.
Reason 8: 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 and services do not sell themselves. Simply put, the success of every enterprise hinges on its ability to sell – and an ability to sell begins by understanding the basics of marketing, promotion, and human psychology. Additional problems associated with poor marketing and selling include relying too much on one particular customer, not focusing on a particular market segment, not undergoing sales training, and ignoring the competition (every business is always competing against something – even if it’s just a customer’s time).
Reason 9: Not Enough Capital.
Too many new business owners underestimate how much money they need. Not to get their business off the ground, but to keep it running through the first year or so of operations when money is tight. That’s not to say that buckets of money are needed to succeed as an entrepreneur. For example, one entrepreneur in the USA made a tidy profit writing and selling a small booklet the contained recipes for 100 different meals made with ground beef. Another American entrepreneur sold fishing lures by doing little more than advertising in a sports journal. For one dollar and the cost of postage, readers were asked to send in an unlucky lure for which they would receive a different lure in reply. The scheme was nothing more than a used product swap yet no one complained and it produced a small profit (Halloran, 1992).
Reason 10: 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. Entrepreneurs want to make as much money as they can while customers want to save as much money as possible. Unfortunately, it’s the entrepreneur that usually loses this struggle. In a bid to attract customers, the most common pricing mistake made by new businesses (especially service providers) is to undercharge or give away labor or materials to attract customers.
Reason 11: Lack of a Competitive Edge
Many small businesses starts out as a cut out copy of another business, thereby providing no incentive for customers to choose it over the available competition. Every enterprise should therefore have at least one aspect that distinguishes it from its competitors. Domino’s Pizza, for example, made its name by focusing on fast deliveries – something few other pizza parlors provided at the time. Dell Computer stays at, or near, the top of its market by manufacturing a personalized product faster than any other computer company in the market.
Reason 12: Going it Alone
Along with not doing enough research and not establishing a close relationship with customers (as well as suppliers), going it alone means relying totally on your own, infallible, all-knowing and superior intellect. Put another way, so many qualified people, books, education centers, and government programs are available 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 ease or difficulty 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 easier.
Reason 13: Growing Too Fast
As odd as it may sound, having too many customers can kill a business. Think of it this way: if a business is swamped with increasing customer orders it has to increase its output, which means that it has to purchase more raw materials, buy more equipment, and possibly hire more personnel. Meanwhile the business is stuck producing the same output until it has the full ability to do more. In other words, expenses soar while revenues stay the same. This lack of incoming cash and increasing debt can result in big problems – and not just financial ones.