Three greatest causes of business failure; a must to avoid by entrepreneurs

In my experience, entrepreneurs who fail typically make one of three mistakes, namely:

1. They have no plan at all.

2. Their plan is not properly thought through.

3. They ‘fiddle’ the figures until the plan makes financial sense.

The mechanics of business plans are beyond the scope of this article. What I can say, however, is that, if done properly, a plan is a good way of testing reality, thereby helping to avoid the overconfidence trap because the process of planning forces you to consider whether your ideas are practical. The trouble is that the most important element of the plan is ultimately guesswork. You can usually estimate costs with reasonable accuracy. More difficult is estimating how many customers there will be and how long it will take for the business to become established.

Starting a new venture, ‘giving it a go’, whether it is a completely new foray into business or branching out from an existing business, can be very exciting. When we feel strongly committed to something, we can develop blind spots, paying more attention to information that supports our preconceived notion while downplaying or even ignoring contradictory information. Some entrepreneurs go into business with no plan, no idea what to expect and therefore nothing to measure success or failure against. Others embark upon business with half a plan; with key elements such as cash flow projections missing. Another problem is what we call ‘gaming’; increasing prices or bumping up the anticipated level of custom until it all makes sense — on paper, that is. It is only when the business starts to travel the rocky road of reality that those optimistic projects start to unravel.

Incidentally, once you become established in business, you may well receive requests from would-be and other established entrepreneurs for financial support. Some — a few — of these opportunities will be worth pursuing. The majority are likely to be ‘no-brainers’. It was one of the Rothschild’s, I think, who said that if he had pursued even a fraction of the opportunities that were offered to him, he would have been rapidly ruined. Treat such investment opportunities with healthy skepticism. Ask the same questions that a bank manager or venture capitalist would ask of you, such as:

■How much is the prospective owner proposing to invest in the idea?

■Who else is involved?

■At face value, does the idea seem credible?

■That market research has been conducted and with what results?

■How comprehensive and well thought out is the business plan?

■Does the prospective owner have the requisite skills and experience to run the business?

■Does the prospective owner have the requisite energy and commitment to go the distance?

Hence, part of requirement for successful business is that, the business must be guided by feasible, testable and verifiable business plan, the business plan must be thought through with evidence to work and also free from fiddling and assuming figures.