Why Businesses Fail and What You Can Do

67% of small businesses fail within the first 10 years according to the Small Business Administration. That is a frightening statistic if you are considering opening or have just opened a small business. Buy why do more than 2 out of every 3 businesses find themselves failing? There are a number of reasons businesses fail, from internal fraud to bad products to poor management, but in this article we’re going to review some of the most common reasons businesses fail and what you can do to help ensure it doesn’t happen to yours.

No Passion

Sometimes the reason a business fails is simply that the owners have no passion for what they do. Industries evolve, especially in todays world where innovation is at every turn. Passion motivates learning, creativity, and forethought, all things which are key to competing in the free market. Its much easier for a proactive operation to thrive than for a reactive one to even survive. A strong knowledge and interest in what you do will help you to connect with your customer base and build trust and confidence and make selling your product much easier.

What to do

Find something you're passionate about, identify what your product or service would be, find your target market and run the numbers to see if you could create a viable business. Don’t jump into something you don’t understand without researching everything you can.

No Plan

Have you ever just randomly walked onto a car lot, chatted up the first salesman you saw and went home in a new car while a tow truck carried the one you drove up in back to your house? No? That’s because most people do some planning before committing large portions of their finances to something. Yet for some reason many people jump into business with little more than an idea.

What to do

Look before you leap. Identify what you're selling, your target market, why they would buy from you, your cost of operations, break even point and structure and flow of your business at least! Preferably you should create a formal business plan and continue to revise it until you know the ins and outs of your business on day one as if it’s been in business 40 years. That being said, you’ll still probably run into something you hadn’t thought of in your first few months, but you will be much more prepared to take it on.

Too Little Capital

A tragic error in startups is beginning with insufficient operating funds. The rule of thumb is to have cash on hand equal to at least 6 months of total operating expenses before starting your business. That is often a lot of money and business owners may get impatient or see no way to raise those funds and start without a solid financial foundation or sufficient prospects for generating enough funds to maintain operations. As a result, they are forced to close before they have had a real chance to succeed.

What to do

Understand that most businesses don’t see a profit for the first 3 years, and many business owners don’t receive a paycheck from their business for the first 5. Prepare accordingly. Secure the funding you would need if your business doesn’t generate a single dollar in revenue for the first six months, but plan smart, work hard and hope that you never have to touch them.

Too large of Upfront Investment

Up-front expenses are not uncommon in starting a business, in fact it’s rare to start a business without putting some form of investment into it before the grand opening. However, over-investing early on can actually create a disadvantage that’s difficult to overcome.

What to do

Evaluate the assets & expenditures that are necessary for your initial expected business activity. Give yourself a little wiggle room and plan to scale your business in time. Sam Walton didn’t form the Walmart Supercenters with in store dining, taxes, haircuts, nails, ect., on day one. You may have a grand vision, but overcommitting your finances and neglecting to build your audience and brand first can kill a good business quickly.

Location and visibility

You may have a fantastic product, an incredible team, and a unique customer experience, but if no one can find you, you don’t have a business. Visibility is paramount, whether you have an online or brick and mortar store.

What to do

Before you set up shop, define your target customers and research where they are and put your business there. You can find a lot of the data you need from the US Census records. If you’re online only, then you may consider running advertisements using A/B testing and target your specific customer base. SEO and keyword site optimization are very important as well. Essentially, no matter what you do a big part of your job is getting your business in front of your target market.

Poor Accounting

Many small business owners find themselves using their business to cover personal expenses, which is both a big risk, and an accounting nightmare. Others ignore the accounting altogether, which is a very dangerous game that, more often than not ends in disaster. Its very difficult, bordering on impossible to know what you’re doing well and what needs work from a financial perspective without solid accounting or bookkeeping.

What to do

Find a system that works for you, whether that’s excel, QuickBooks, or hiring out a bookkeeper/accountant. There is a reason most businesses hire accounts with at least a four-year degree. Its important work, it’s necessary, and it absolutely MUST be done right.

Additionally, having entirely separate financial accounts for your business and personal affairs is a must. It will help you keep your books, keep your taxes clean, understand your finances, make applying for credit simpler and overall, just make life easier in the long run.

Lack of Business Experience

Many small business owners are people who have found something that they are extremely good at and decided to go out on their own to make it a business. That’s half the battle but business is its own trade and skill. While I believe that anyone can learn business, most people are too busy doing what generates the revenue to take the time to learn how to build a thriving operation. Unfortunately, taxes, payroll coordination, evolving markets, paradigm shifts, increased competition, monitoring & improving efficiencies, marketing, and a slew of other functions take a backseat and the business either never realizes its full potential, or completely fails.

What to do

Effective business management means having the experience and understanding to make the calculated decisions and foresee future challenges and make necessary adjustments. You don’t have to be an expert in all things, but a good business owner does need to put the right people in the right places in order to succeed. This can come in the form of a partner, direct hire, outsourced business manager, accountant, or business consultant.

Inefficient Inventory Management

For any business, good inventory management is critical. Tying up working capital in inventory is risky, so understanding and maintaining a good system of inventory can make or break a business. A good statistical, experience-based projection of supply needs will benefit your business immensely more than simply stockpiling and hoping it all sells, especially with items like food products with a specific shelf life.

What to do

Constantly analyze your sales and inventory for trends to really zero in on where your inventory levels should be and make adjustments when necessary. Count inventory regularly to ensure your system is accurate.

Outpaced by competitors

The beauty of capitalism is the ability of anyone to join the free market and start doing business. The downside to capitalism is just the same. Competition is good for the consumers, but for every new competitor that joins the market the market share is divided that much more.

What to do

Find your competitive advantage. Ask yourself “why would anyone choose to do business with me over my competitors” and “what do we/can we do better than our competitors”. Additionally, you should be asking yourself what you are doing poorly. Look for ways to leverage your advantage & find out what the cause is behind those areas where you are not performing to the standards you desire.

Don’t get complacent. Complacency is like doing well in a race and deciding to walk instead of run since you’re already ahead.

Poor Cash Flow

This may seem obvious, but cash flow is crucial to business success. You can make $1 million in sales, but it does you no good if you can’t collect and its stuck in receivables for all time while you have bills of your own to pay.

What to do

Establish clear credit terms with your customers. Is it COD, Net 15, Net 30? Whatever your terms are make sure to check out your customers beforehand to make sure that they can and will pay you. Bear in mind that some competitors may use lenient payment terms or options as a means to entice customers, so you may be fighting market constraints when you set terms.

No Market or Limited Market

Like I mentioned earlier. You may have the best thing out there, but if you have no customers, you have no business. Your target market may be a moving target or maybe you opened shop without making sure there was a market to begin with. This is difficult to overcome, and businesses fail for this reason.

What to do

Research your target market and identify what may bring them to your business or relocate to where they are. Research similar operations and their tactics for gaining a market share. Find what there is a market for and if possible, adjust your operations to fill that need. Ultimately, this is one that not many businesses find their way out of.

Businesses fail every day, but more often than not their downfall could have been avoided. Its important to treat your business as a living creature. When its not doing well there will be symptoms that will allow you to diagnose the problem and hopefully find a viable means to get back on track. Setbacks are difficult, but learn from them, adapt and keep moving forward.