Why does
a business fail?
Determining why most
businesses fail can be a helpful identification of the eventual decline phase
of a business. Small firm performance has been studied from a variety of approaches
to better understand why some firms fail and why others succeed. Some researchers
classify business failures as catastrophic or general lack of success. About two-thirds
of those businesses that cite economic factors as a reason for failure,
indicate that a lack of profits is the primary reason. Catastrophic failures
also result from fire, fraud, burglary and acts of God. While no person starts
a new venture preparing for failure, they can have a clear plan for success
which involves actions if things do go wrong.
According to statistics
from Dun & Bradstreet, 88.7% of all business failures are due to management
mistakes. Some of the leading management mistakes that lead to business failures
are: going into business for the wrong reasons; the entrepreneur gets worn-out and/or
underestimated time requirements; family pressure on time and funds; pride;
lack of market awareness; the entrepreneur falls in love with the product
business; lack of financial responsibility and awareness; lack of a clear focus
etc.
The broad causes that lead
to a business failure:
Lack
of Industry Experience
Every business has an
environment in which it operates. The internal resources of a firm must match
the needs of the environment to which the firm caters. Lack of experience in the
industry will lead to poor organization of a firm and its resources. The
structure of the industry in which the organization operates substantially
influences small firm performance outcomes
Inadequate
Financing
Financing is the
lifeblood of growing a business whether in the startup phase or in a later stage.
Many businesses fail due to lack of proper financing channels. It is not a
matter of unavailability of funding, but the lack of planning for funding to
support opportunities for growth. Planning in advance, rather than looking for
financing just when needed, is a good practice. Trouble results when
entrepreneurs do not have sufficient awareness of the costs involved in raising
capital, are not prepared with alternative sources in case of rejection from financiers,
fail to consider using a combination of debt and equity to fund the business
or, in general, fail to plan for growing their business to avoid the crisis of financing.
Lack
of Adequate Cash Flow
Cash flow is the
measure of a firm's ability to maintain sufficient funding to meet its expenses
for the day-to-day activities of the business. Many small businesses fail
because owners have a difficult time projecting what cash will come in every
month, and thus, how much can go out. It is vitally important for an
entrepreneur to learn some basic accounting disciplines and be able to make
cash flow projections that will help them understand how much they can afford
to spend every month.
Poor
Business Planning
Nine out of ten
business failures in the United States are caused by a lack of general business
management skills and planning? A good business plan helps identify the mission;
cost structure; market; external influences; and strengths and weakness of a business.
The business plan can separately include a marketing plan, operating plan, etc.
Management
Incompetence
Ninety percent of
business failures are associated with "management inadequacy", which consist
of either management inexperience or incompetence. Good management efficiently
implements and monitors the strategic and operational plan of a business. A
good strategic plan is only good as the management's ability to implement
changes in day to day operations
Ignoring
the Competition
Capitalism is a
cutthroat system. Customers are always looking for the best deal, or at least,
a better deal. And if the competition offers better products, services, or
prices, the customers will succeed at the expense of the business. Keeping an
eye on competitors and positioning the products accordingly is vital to staying
in business.
Unworkable
Goals
It is one thing to set
goals and another thing to set workable goals. Entrepreneurial initiatives are
fundamentally influenced by uncertainty. Setting realistic goals, within the
bounds of acceptable risk taking and optimism, is important.
Diminished
Customer Base
Competition can cause
the customer base to diminish. From a small business's perspective, it is good
to focus on a customer strategy that works well for their business. At the same
time it is also dangerous to focus only on one recipe for success.
Diversifying the
customer base is an important factor in building the business. Being flexible
enough to adapt to new trends and ideas is important to staying in business.
Uncontrolled
Growth
Uncontrolled growth of the
business can also cause it to fail if not handled appropriately. Obesity is a
problem in business as it is in an individual's health. Proper planning must be
in place even for business growth. Successful growth requires a professional management
team, flexible organization, and proper systems and controls.
Inappropriate
Location
The old real estate
maxim - location, location, location - may be even truer in the small business world.
Even the best-run retail establishment will have a difficult time succeeding if
it is in a poor location. Location may not be applicable to all types of businesses,
but when it is, it may be critically important.
Poor
System of Control
While setting proper
goals to manage the business, a system of controls is also needed to measure
performance. Checks and metrics help owners manage organizational activities. A
firm cannot control the external factors affecting its environment such as
customers and competitors but it can adapt its internal organizational
activities. A lack of proper control on internal activities can eventually lead
to business failure. Controls can be implemented in several aspects of the
business. Controls can be set in place to measure the quality and quantity of
production. Certain financial controls are needed to measure the overall
financial performance of the business. A good control system will establish standards,
measure performance, compare performance against standards and then provide for
a way to correct procedures where needed.
Lack
of Entrepreneurial Skills
Mostly during
the startup phase of a new business, lack of entrepreneurial skills in an owner
can cause a business to fail. This may not be true during the later growth and maturity
periods of business where more administrative and management skills are required.
A small firm's performance outcome is a function of many variables, including individual
owner characteristics, owner behaviors, and environmental influences. Entrepreneurs
generally have a high need for achievement and social awareness, and they are
high risk takers. Consequently, the personal and personality characteristics of
an owner can be a cause of business failure.
No comments:
Post a Comment