Aspiring entrepreneurs can at least take heart in the fact that not all of the available stats about business failure are credible. One of the foremost of these invalid stats is attributed to a study done by Bloomberg and which declares that 8 out of 10 businesses fail within the first 18 months. The stat has been widely referenced including here. It’s sort of reassuring that this particular study is non-existent.
According to the SBA approximately 50% of new businesses survive for 5+ years while about one-third survive for 10+ years. There is however sufficient reason to question this statistic as well and this has to do with how the reason for failure is defined. Indeed, businesses close down for a variety of reasons, apart from failure. The SBA’s stat is therefore inaccurate.
This position is supported by a University of Tennessee 2013 study which showed that only 25% of businesses failed in Year 1 while just 36% failed in Year 2. An alternative independent study estimates the number of closures at 3% to 25%.
I digress though. This post isn’t about business failure stats but rather the reasons why new businesses fail.
Hopefully you are now more upbeat about launching your business venture. Don’t let your optimism cloud prudence though. Here are some reasons why your startup could make the annual damned 25% list:
1. Your motivations for entrepreneurship are misguided
To succeed in an entrepreneurial career you have to be pragmatic right from the get-go. In addition to having a passion for what you intend to do, your reasons for starting a business should be based on a practical foundation. Your startup must be focused on providing a practical solution for an identified need in the market.
Business failure is a harsh reality…
If your reasons for starting a business are to make more money, escape the 9-to-5 lifestyle and be answerable to yourself only, etc, you clearly need to rethink things. These are the perks of a successful entrepreneurial lifestyle and they don’t come easy. In entrepreneurship things typically get worse before they get better.
2. Lack of a unique value proposition and innovativeness
Deciding to offer a product/service that virtually everyone else is providing and doing this in the exact same way is really business suicide. Naturally you will have to contend with poor revenues month after month. The probability of making real progress is virtually zero – how can this happen when you are barely able to make enough?
Many businesses offer the same products/services but the most successful among them are the ones that do this in a unique way. Think about your business – what can you do to set it apart from the rest? Once you find the answer make sure that this uniqueness is well communicated to the target market.
3. Ignoring customers feedback
One adage that you must never forget as a business owner is that the customer is always right. The reason is simple – without customers your business is useless. Engaging with your customers therefore will give you a firsthand opportunity to learn about those things they feel will make their buying experience better. Customers feedback, whether offline or online, will give you hints about what to improve on with regards to your product/service, business practices, pricing, etc. Ignore feedback at your peril – when customers decide to ignore you back the failure list could be where you are headed.
Ignoring customers feedback is the one-way street to business oblivion…
4. Incompetent management
Being the owner of a new small business often means that you are in charge of just about every aspect of running the enterprise. You are therefore supposed to handle or oversee the critical roles of production, sales, purchasing, finance, marketing, customer relations, hiring and managing staff, etc. Don’t forget that you are the custodian of the company’s mission and vision – in charge of providing direction and strategically steering the company forward.
Business success depends on how well an entrepreneur handles the managerial role…
The characteristic volatility of the workplace and marketplace ensures that no two days are the same. To be successful as a manager therefore you must learn how to be proactive and to stay on top of things. Indecision, neglect, lethargy and other qualities of this ilk are the hallmarks of a poor and dysfunctional leader.
5. Insufficient capital and poor cash flow
One very significant reason why many startups fail is the lack of sufficient funding. Before launching a business you must ensure that you have enough funds to cater for startup costs and to support operations until the venture becomes self-supporting. Clearly one needs to be realistic. Businesses do take some time to get going. Having enough funds to cater for operational expenses for a year or two is advisable in order to give the business ample opportunity to establish itself in the market.
6. Financial mismanagement
Failing to properly account for business money is a sure path to early failure. From a financial perspective, effectively running a business means that you’ve got a grip on cash flow, expenses, taxes, employee salaries and benefits, etc. Many business owners opt to delegate this aspect of running a business to accountants or bookkeepers out of sheer reluctance to learn the basics of money management. Opt to not be ignorant. At the very least you should be able to understand simple financial documentation including a balance sheet, P&L statement account and a cash flow statement.
7. Poor location
Even the best funded and managed startup will find it difficult to survive and thrive if the location is wanting.
Consider the spot where you intend to open shop. Is it easily accessible for your target customers and suppliers? Is it secure? Are all the necessary amenities provided? Is the local community receptive or hostile to new businesses? Is the cost running the business from there manageable? Would it be wiser to relocate to a cheaper neighborhood?
Are you sure that your business’ location can’t be better?
8. Failure to adapt to market changes
The marketplace is typically dynamic – never static. Your initial business model may be working wonderfully for now but moving forward you’ll need to adapt to the changes in the marketplace in order to remain relevant. Many a business owner has opted to adamantly maintain status quo in the face of changing times only to make a belated realization that in the business world it is “adapt or die”.
9. Ineffective marketing
It’s no good to have a superb product or service if no one knows about it. If they don’t know about it they won’t buy it and if they don’t buy it you’ll be out of business. Marketing is therefore imperative for business success.
Marketing doesn’t have to be all complicated and expensive. Depending on what you are offering you definitely have several cost-effective options to consider starting with word-of-mouth which is absolutely free. How about using social media to spread the word even further?
10. Overambitious expansion
Upon achieving early business success many entrepreneurs erroneously embark on an expansion spree without adequately thinking about whether the move could be premature. The reasons for success vary and could indeed be temporal. For this reason, steady business growth is most advisable. Expansion efforts should be based on well observed and deliberated business realities as well as marketplace trends and opportunities. Steady growth will allow you ample time to secure the required systems and people that will give the new addition to your business a fair shot at success.
11. Hiring the wrong team
Successful entrepreneurs will tell you that nothing quite beats having a good team. Your staff should be individuals who are equally motivated to succeed and see the business grow and go places. It is therefore important for you to hire people who can talk and walk the part. Getting such people won’t be easy but once you find them make sure that they have a good reason to stay.
Hiring a dysfunctional team is catastrophic for business success
12. Lack of a website or any online presence
The number of people with Internet access globally is at an all-time high and continues to rise by the day. As such, conventional methods of conducting business searches are being tossed aside in favor of online convenience. The lack of an online presence is therefore counter-effective for a modern-day business. Even though your business doesn’t sell goods/services online it is of utmost importance that people know about its existence. The site must of course be presentable enough so as not to put off potential customers.
It’s of the essence to ensure that your small business has an online presence
The least you should do in case you don’t have a website is become part of the social media conversation. Starting a company Twitter or Facebook account is a more than sufficient way to guarantee your business’ visibility and relevance.
13. Underestimating the competition
For a new business, gaining customer loyalty is quite akin to wooing a beautiful lady – the loyalty has to be earned, and the suitors are plentiful. As such, you cannot afford to take your customers for granted assuming that they’ll always come back for more. Remember that the competition is eyeing the same target market; up the game best and the customers will come in droves, remain mediocre and stare failure in the face.
14. The belief that you can do it all
However high your motivation and energy levels are it will be foolhardy for you to believe that you can alone deliver success for your business. It’s prudent therefore to seek advice from persons with longer and better experience about how best various aspects of business operations can be handled. Delegating tasks to capable staff is equally vital.
Why risk burnout and the failure of your business when all you have to do is ask for a little help?
15. Unwillingness to take responsibility
As the business owner you must be willing to admit and own your mistakes without exception. Apportioning blame to others or to circumstances will only briefly soothe the ego but the realities of the situation will still need to be addressed. Running a small business successfully is about the ability to remain objective and goals-oriented.
Hope springs eternal though. Things may be really grim for your business venture right now but hopefully it isn’t too late for you to turn things around. It’s not going to be easy but if you are committed to the cause your entrepreneurial dream need not be added to the “crashed and burnt” list. Here are some tips for how you can turn around the fortunes of your business for the better.