Why Businesses Fail
Here are four main reasons why businesses generally fail:
- General Business Reasons
- Financial Factors
- Human Resource-related
- Marketing Factors
General Business Reasons
There are many reasons why companies fail. Among the top reasons is the lack of a well-developed business plan. This includes inadequate or insufficient planning even before starting it.
Failure also occurs when the entrepreneur is overly optimistic about achievable sales and underestimates what needs to be done to sustain the business or reach the desired goal. In fact, miscalculated growth strategies often account for such failures. Then there’s consistent poor service that turns customers off.
To aggravate matters, many small businesses do not recognize or even ignore their shortcomings. Because of their lack of relevant skill sets, they do not address these problems or seek help from others. They see consultants or professional help as a waste of money. To aggravate matters, management could be in a constant state of denial, which happens to be one of the top reasons why businesses fail.
Lessons to be Learnt
• Do you have a business plan (career plan) or do you leave it to fate?
• Are you too overconfident about your abilities and have unrealistic expectations?
• Do you over-promise and under-deliver?
• Do you provide poor service (poor quality, missed deadlines, broken promises, etc) to your stakeholders and have turned them off?
• Are you aware of your short-comings and weaknesses?
• Do you have the right skills and knowledge to do the job?
• Do you blame others for your failure and are reluctant to learn from more qualified or experienced people?
Financial Factors
Financial reasons are the next factor contributing to business failure. Poor cash flow management skills or poor understanding of cash flow can cause the company to fall apart. Cash flow is simply defined as a measure of a company’s financial health where it involves the movement of money into and out of the business.
Many small businesses make losses because their operating costs are too high, relative to their sales revenues. While it might take two or more years for the company to breakeven, many entrepreneurs are unable to sustain their operations.
While investing in office premises, machinery, and other business related items are necessary during the initial start-up period, a number of businesses underestimate the cost of doing business. They make the mistake of making extravagant investments or purchases without adequately considering the return on their investment. They might overlook other business expenses and hidden costs and fail to budget for them.
Their failure to manage their cash flow and high business costs, combined with lower sales than expected amplifies their financial woes and before long, they run out of money.
Financial matters also haunt start-ups that experience early success. They too can fall victim to over-expansion. Yes, growing too fast can also lead to undesired outcomes as the company over-commits resources it cannot afford to. In anticipation that sales can be sustained or even grow, the company takes on further debt by borrowing from banks to finance their expansion, such as setting up more retails stores, stocking up inventories, aggressive advertising, etc.
Finally, businesses encounter bad times when they make the mistake of not pricing their products properly. This happens when they fail to include all necessary items when setting prices, or that they underestimate the impact of competitive pricing. Thus, the wrong pricing strategy takes its toll on the company’s bottom-line, in spite of the fact that the product might be of superior quality.
Lessons to be Learnt
• Do you know how to manage money and your own cash flow?
• Is your operating cost too high (your personal expenditure) relative to your revenue (your income)?
• Are you expanding your business too quickly by over-committing your financial resources (i.e a new car or house when you are doing well in your career) and have taken on too much debt?
• Have your priced your products and services correctly (meaning that you are not under-paid based on your qualifications and skills)?
Human Resource Related
Besides general and financial related factors that contribute to a business downfall, human-resource related reasons can also be one of the causes for failure.
Studies indicate that businesses could fail because of management’s inability to delegate properly. They choose to micro-manage work given to others or over delegating but abdicate important management responsibilities. As a result, employees’ morale is affected while the company loses its sense of direction, focus and mission.
Besides failure on the part of the management, hiring the wrong employees is also one reason why businesses stumble. Often, bosses will hire mere clones of themselves and not people with complementary skills. Or they could hire friends and relatives, prompting favouritism and discrimination in the office place.
Lessons to be Learnt
• Do you “micromanage” by wasting a lot of time on unproductive matters or minute details?
• Are you afraid to make decisions and prefer to let others make decisions on your behalf?
• Do you mix around with the wrong kinds of people which limits your growth (e.g people who criticize, discourage you or give you flawed advice)?
Marketing Factors
The final factor causing businesses to close is related to marketing. Businesses often minimize the importance of promoting the business properly. In fact, many of them don’t even focus on promoting their products and services at all. Then there are businesses that do not make use of the full-spectrum of marketing activities. For example, they choose only to advertise but ignore publicity-related activities such as product launches or issuing press releases.
For those who do embark on marketing initiatives, they promote their products and services too aggressively that they end up generating ill-will among their prospective customers. The same negative image is generated towards businesses which make false promises or claims to their prospective buyers in order to make a sale.
Besides promotional activities, competition is another area which businesses overlook in terms of impact and which have severe consequences on the mid to long-term future prospects. Entrepreneurs often do not understand who their competition is or, in many cases, ignore competitive movements or initiatives. For example, when asked how their offerings are different from their competition, they are unable to articulate a competitive advantage. Then there are those who are slow to react to pricing pressures or to new competing products with superior price-performance benefits. Sometimes, a business could be doing so well that over-confidence sets in with the management. They pooh-pooh any major competitive products or services but only to find later, that their own business is affected as sales take a nosedive.
Businesses also fail because of too much focus and reliance on a single product, a fixed set of customers or clients. This scenario happens when a business closes deals with a few major customers and becomes complacent. Relationships with these customers start to deteriorate as the business either does not maintain its service quality or fails to offer preferential treatment. The problem here is that companies forget about the importance of customer-relationship management in ensuring long-term sustainable sales. They hence find themselves stranded with a huge revenue hole when key customers abandon them.
Lessons to be Learnt
• Do you promote yourself and your capabilities in your resume or in your current job (or do you keep a low profile)?
• Do you have good branding where your reputation precedes you (i.e you are known to be good in something)? Or do you have a bad reputation instead?
• Do you over-promote yourself by taking credit for what you didn’t do in the work place? Or do you over-estimate what you are capable of delivering?
• Are you aware of who is the competition (those competing for management attention and recognition or those who enjoy a closer relationship to your bosses) in your work place? What do you do better than the competition?
• Are you over-reliant on just one customer (i.e your boss)? Do you also cultivate good relationships with your peers, managers and stakeholders from other departments just in case your boss moves on?
The above are just some of the reasons why business fail - and applying them to your own life can help you to avoid failure. Actually, failure can stem from one or more of the key departments within your life's business.
Now that you have seen the same factors that contribute to business failure can be applicable to our own lives, can you think of other reasons why businesses fail - and how we can learn from these mistake in our own life's business? Please contribute.
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