Some estimates claim that up to 95% of new businesses fail within five years. Others say the number is around 65%. Either way, these are staggering figures when one takes into account that most new businesses fail for more or less the same reasons. Most of these reasons are presented below ranked in the order of the threat they pose according to the entrepreneurs surveyed for this book. Note, however, that those placed at the end of the list are not the least dangerous. \u2018Any one of them, combined with another or on its own, carries enough firepower to bring down a business,\u2019 says the owner and operator of ASAP UK Ltd. (a sign making and print shop in Southampton, England). It therefore makes sense to do as much as possible to avoid all of them.<\/p>\n\n\n\n
Reason 1: Inadequate Planning<\/strong><\/p>\n\n\n\n As simple as it sounds, lack of forethought and planning is the main culprit behind virtually every business failure. Thankfully, 75% of most business ideas fail on paper (i.e.: the planning stage), which is exactly where a business idea should fail. The only other option is to collapse on the street, perhaps under a pile of debt. Inadequate planning includes (but is not limited to), not fully understanding a product or service before selling it, not conducting detailed market or labor research, not compiling a realistic customer profile, not researching the competition, not selecting a proper business model, not determining all costs beforehand, or, in general, not doing enough preliminary work to determine if all the numbers add up. In short, running a business without a well-researched plan is like hacking through a jungle without a map. <\/p>\n\n\n\n Reason 2: Underestimating the Commitment it Takes to Succeed<\/strong><\/p>\n\n\n\n In a world where almost everything is wanted on a silver platter the moment it\u2019s demanded, it\u2019s easy to forget that quality and strength take time to acquire. For example, it can take up to six months or longer to put together a business plan and as much as five to seven years (or longer) to establish a solid customer base. I\u2019ll use the story of the photocopier to illustrate this point. The idea of photocopying text instead of making copies by hand was the brainchild of Chester Carlson, a visionary who developed his first successful machine-made \u2018dry writing\u2019 image in 1939. Over the years Carlson offered his idea to over 20 companies including GE, IBM, and Kodak, yet each turned the invention down by explaining that photocopiers weren\u2019t needed because carbon paper was good enough. Much to his credit, Carlson persisted \u2013 eventually winning over the president of a small photographic paper company (Joe Wilson) who agreed to fund the development of what he saw as a promising new idea<\/p>\n\n\n\n Reason 3: Cash Flow Problems<\/strong><\/p>\n\n\n\n If passion, commitment, and planning are more important than money, then why do cash flow problems appear at the top of a \u2018reasons why business fail\u2019 list? Think of it this way: money isn\u2019t needed to conceive a baby, but once a baby is born it needs to be fed \u2013 and the bigger a baby gets the more food it needs. So it is with a business. Too many entrepreneurs confuse the word cash with the word profit, thinking that they\u2019re one and the same. \u2018Profit\u2019 is a word for accountants. \u2018Cash\u2019 is what a business feeds on in order to survive. Employees, banks, and many suppliers must be paid in cash \u2013 not profit percentages. If customers take 30 days, 60 days, 90 days, or longer to make their payments, a business could be in trouble if it needs those payments to cover expenses. One of the most difficult things to explain to wannabe entrepreneurs is that profitable businesses all too often end up going bust due to cash problems because much of the world runs on credit. <\/p>\n\n\n\n Reason 4: Poor Management<\/strong><\/p>\n\n\n\n Entrepreneurship is the death of management. Paradoxically, it\u2019s also been said that management is the death of entrepreneurship. What these comments refer to is the belief that after setting up a business too many entrepreneurs stiffen into rigid managers that are guided by routines \u2013 a problem that probably arises due to the fact that most people don\u2019t know what good management is about. In short, management is not about being a boss. Good management is about serving others: providing for others, motivating people, getting work done through others, and streamlining a business toward making a sale \u2014 and that\u2019s just the beginning. Indeed, some practitioners believe that managers in denial of what\u2019s going on in their business is the real number one reason why most businesses fail. <\/p>\n\n\n\n Reason 5: Not Understanding the Importance of Customers<\/strong><\/p>\n\n\n\n Setting up a new business involves so much work that it\u2019s easy to forget about paying customers. Interior design, bookkeeping, product displays and other non-revenue producing activities \u2013 although important \u2013 should not be the priority of a business. Successful business operations are reliant upon receiving money from satisfied customers on a regular basis. Yet no matter how simple this concept sounds, it\u2019s surprising how many businesses lose sight of it. For example, years ago a wealthy doctor wanted to purchase industrial-size washing machines and dryers for the hospitals he owned. <\/p>\n\n\n\n What is it that causes people to lose sight of the fact that to make money and survive a business must focus on its customers?<\/p>\n\n\n\n Reason 6: Staffing Problems<\/strong><\/p>\n\n\n\n People problems usually begin by:<\/p>\n\n\n\n No matter what the business, finding honest workers who share the owner\u2019s passion and commitment can be an arduous and time-consuming process. To be sure, almost every small business has, at one time or another, been forced to hire the first breathing job applicant that appeared in the doorway. That being said, it is possible to entice capable people into joining an organization because it, or the person behind it, impresses them. Don\u2019t be the type of boss whose behavior resulted in a prospective employee leaving his or her last job (\u2018Though we are supposedly living in a democracy, most of us spend our lives working in private tyrannies,\u2019 says business writer John Emerson). As an entrepreneur, you may not be able to pay your employees more than your competitors, but you can certainly give them more. <\/p>\n\n\n\n Reason 7: Inflexibility<\/strong><\/p>\n\n\n\n Small businesses should not act like rigid, inflexible corporations. From the business plan to the marketing campaign to the importance of finalizing a sale, if something isn\u2019t right it should be changed quickly. Change can happen in one of two ways: it can either be done by you or it can be used to run over you. Keep in mind the definition of insanity (the constant repetition of a behavior with the expectation of a different result) and the perils of inflexibility become more obvious. Persistence is an admirable trait, but when it turns into stubbornness it can lead to trouble. <\/p>\n\n\n\n Reason 8: Poor Marketing and\/or an Inability to Sell<\/strong><\/p>\n\n\n\n Contrary to popular belief, if you build a better mousetrap the world will not beat a path to your door. Equally as true is that good products and services do not sell themselves. Simply put, the success of every enterprise hinges on its ability to sell \u2013 and an ability to sell begins by understanding the basics of marketing, promotion, and human psychology. Additional problems associated with poor marketing and selling include relying too much on one particular customer, not focusing on a particular market segment, not undergoing sales training, and ignoring the competition (every business is always competing against something \u2013 even if it\u2019s just a customer\u2019s time). <\/p>\n\n\n\n Reason 9: Not Enough Capital. <\/strong><\/p>\n\n\n\n Too many new business owners underestimate how much money they need. Not to get their business off the ground, but to keep it running through the first year or so of operations when money is tight. That\u2019s not to say that buckets of money are needed to succeed as an entrepreneur. For example, one entrepreneur in the USA made a tidy profit writing and selling a small booklet the contained recipes for 100 different meals made with ground beef. Another American entrepreneur sold fishing lures by doing little more than advertising in a sports journal. For one dollar and the cost of postage, readers were asked to send in an unlucky lure for which they would receive a different lure in reply. The scheme was nothing more than a used product swap yet no one complained and it produced a small profit (Halloran, 1992). <\/p>\n\n\n\n Reason 10: Pricing Problems<\/strong><\/p>\n\n\n\n The price of a product is usually the most significant factor affecting a customer\u2019s decision as to whether or not the product will be bought. Equally as true is that a price contains the profit a business hopes to make. Entrepreneurs want to make as much money as they can while customers want to save as much money as possible. Unfortunately, it\u2019s the entrepreneur that usually loses this struggle. In a bid to attract customers, the most common pricing mistake made by new businesses (especially service providers) is to undercharge or give away labor or materials to attract customers. <\/p>\n\n\n\n Reason 11: Lack of a Competitive Edge<\/strong><\/p>\n\n\n\n Many small businesses starts out as a cut out copy of another business, thereby providing no incentive for customers to choose it over the available competition. Every enterprise should therefore have at least one aspect that distinguishes it from its competitors. Domino\u2019s Pizza, for example, made its name by focusing on fast deliveries \u2013 something few other pizza parlors provided at the time. Dell Computer stays at, or near, the top of its market by manufacturing a personalized product faster than any other computer company in the market. <\/p>\n\n\n\n Reason 12: Going it Alone<\/strong><\/p>\n\n\n\n Along with not doing enough research and not establishing a close relationship with customers (as well as suppliers), going it alone means relying totally on your own, infallible, all-knowing and superior intellect. Put another way, so many qualified people, books, education centers, and government programs are available to help entrepreneurs that it simply doesn\u2019t make sense to venture into the marketplace alone. If help is needed it should be asked for. The economic strength of a nation is often reflected in the ease or difficulty with which a citizen can start a business. That\u2019s why it can take thousands of dollars, hundreds of pages of forms, and more than a year of effort to register a business in many developing countries. Developed countries, on the other hand, make the process easier. <\/p>\n\n\n\n Reason 13: Growing Too Fast<\/strong><\/p>\n\n\n\n As odd as it may sound, having too many customers can kill a business. Think of it this way: if a business is swamped with increasing customer orders it has to increase its output, which means that it has to purchase more raw materials, buy more equipment, and possibly hire more personnel. Meanwhile the business is stuck producing the same output until it has the full ability to do more. In other words, expenses soar while revenues stay the same. This lack of incoming cash and increasing debt can result in big problems \u2013 and not just financial ones. <\/p>\n","protected":false},"excerpt":{"rendered":" Some estimates claim that up to 95% of new businesses fail within five years. Others say the number is around 65%. Either way, these are staggering figures when one takes into account that most new businesses fail for more or less the same reasons. 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