Why Do Businesses Fail?
Date: 03/05/2007
Why Do Businesses Fail?
There normally a number of consistent reasons why a business fails. Here are the top 12 reasons why businesses fail. Learn from them, and plan NOW to avoid failure.
Lack of Expertise
The first question to ask is whether you’ve got what it takes to run a small business. You may have run a department in a big organisation, but is that experience going to be as useful as you think? After a lifetime in large companies, many people simply cannot face life outside the cocoon. They have become specialists relying on other specialists, and supporting staff to get things done. Starting a business from scratch calls for remarkable versatility. The owner-manager types the invoice with one finger in the evening, does the books at weekends, sells on Monday, designs on Tuesday and delivers when he/she can.
No Product Strategy
New business people almost always define their product in physical terms. Customers, on the other hand, want their needs satisfied. Compare a Bic and a Parker pen. In basic physical terms they are very similar; they both write well, their caps protect your pocket from ink stains, both have clips that can hold them in place and they are comfortable to grip. But one costs around 10p and the other from around £3. Customers pay the extra £2.90 for largely intangible benefits such as status or the pleasure it brings as a gift. Bic and Parker are both successful products but the needs they satisfy are poles apart. Until business people can define their market’s needs they cannot begin to assemble a product to satisfy them.
Miscalculating Market Size
People often shun the rigours of market research or simply do not know how to carry it out cheaply. Their judgement is subjective and they can develop the iceberg syndrome, believing that the small number of customers they can see are a sure indication of the mass of other customers. It is a fundamental misconception to believe that people are simply waiting to be sold goods/services and that competitors are blind or lazy. New businesses need perception of the market they aim to satisfy. There has to be a well-developed marketing strategy before a business is launched.
Under Estimating Start Up Time
Money must often be invested in premises, equipment and stock long before customers come along to buy. There are always problems getting a venture off the ground, yet new business people mostly count on a smooth ride; you should estimate how long you think everything will take and then double it and add a bit more. If you have to open for a certain date, say for Christmas, and you do not open until January, your business will be ruined before it begins.
Lack of Capital
Over-optimism about market size and underestimating the time needed to get started invariably leads to working capital problems. Scarce cash is tied up in stock that will not be needed for months; this could be used to pay rent and your living expenses. Until customers start buying in reasonable numbers, money is flowing in one direction only – and may run out. It is hard to get money when you need it desperately. The time to negotiate an overdraft with a good margin of safety is at the outset. A well-prepared cash flow forecast will also help you to decide how much is needed and when.
High Start Up Costs
Every new business has to spend money on items such as fixtures, fittings and equipment. The danger lies in spending too much too soon. People from business often have extravagantly high standards. They expect an electronic typewriter and photocopier close to hand and an executive style office at the outset. These overhead expenses have to be recovered in the price of the products to be sold, and the essential competitive edge can be lost at the outset. New businesses should be lean and meagre.
Fast Initial Growth
Most people think their problems are over once customers start to roll in. Unfortunately, they have just begun. A business changes its shape very rapidly in the early weeks and months. As sales grow, ever-increasing sums of cash are needed to fuel growth. Soon the bank is accusing the owner of over trading, growing faster than cash resources allow. Once again, a good cash flow forecast would help predict the problem and win over sceptical bankers.
Mistaking Cash for profit
Employed people view the money that comes into their hands as being valuable for spending. Usually their pay cheque reaches them after a wide range of deductions have automatically been made. The reverse is true for the owner-manager. Cash flows into the business intact and he/she has to make provision to pay National Insurance, VAT, income and possibly Corporation Tax, supplies, etc. Too often, entrepreneurs yield to the temptation to use this cash to maintain their living standards in the belief that it is largely profit. When the bills come in, they cannot meet them. The Inland Revenue and Customs and Excise are the most active in putting businesses into liquidation.
Wrong Location
Where you conduct your business and how much rent you pay is vital. For shops and restaurants, which rely heavily on passing trade, this may seem obvious – yet many get it disastrously wrong. One central London site has had five restaurants open and close in the last eight years. It cannot be all down to bad management or bad luck.
Wrong People in the Wrong Jobs
Big companies that employ thousands of people can afford to make mistakes in staff selection. They can even carry a few passengers. A new business person taking on the first employees cannot afford to get it wrong. Taking a partner is a popular alternative to employing someone but partnerships, like marriages, often flounder on misconceptions and misunderstandings.
No Management Accounts
Liquidators say almost all the businesses they are called in the wind up, have no reliable management accounts. “If only I’d known the financial situation earlier” is often the failed entrepreneur’s stock exclamation. New business people often see accounting as a bureaucratic nuisance carried out for the Inland Revenue’s benefit alone. Those same people would never drive a car without a fuel gauge, speedometer or oil pressure indicator. Yet they set off at break neck speed, running their businesses with only the annual accounts to guide them, and break their necks. For them, the end of the first year is often the end of their business.
Head in the Clouds
Many people are destined to fail before they even start because they don’t understand the realities of setting up a business and running it effectively. Some of these are the people who wander around aimlessly without a business plan but talking constantly to all and sundry about how they are going to be a millionaire next week. There are also those who can’t get out of bed and force themselves to be at work by 8am every day. Then there are those who believe that sitting staring at the office wall will bring customers in, and those that take days off because they think things can wait until tomorrow. There are those who regularly go out for lunch and never return to work. A start-up business is highly demanding – much more demanding than working for someone else. Building ‘castles in the sky’ is quite okay provided they are given firm foundations.
