Why do so many small businesses fold prematurely, failing to grow beyond their “startup” stage? Often it is because entrepreneurs find themselves so busy “fire-fighting” and spending their time on daily operational tasks, they neglect to apply key success factors to managing a profitable business.
Small businesses need not fail, however, if entrepreneurs can take heed of these 10 common reasons for business failure and adopt remedial actions:
- Lack of a Business Plan
By sitting down (or standing up, if you have one of those nifty new convertible desks) to draft a detailed and well-considered business plan, it forces you to think more deeply, and more holistically, about your new business, including: your business idea and strategy, your management team and their responsibilities, your objectives and milestones, financial needs and funding sources, product lifestyle, marketing activities, competition, and ultimately, your expansion or exit plan.
As will be covered later in this article, a lack of proper planning before embarking on a new venture can have dire consequences in the future. It is crucial to anticipate and budget for your business’s evolution, market changes, and for economic downturns.
- Low sales – No Demand, Wrong Price, Wrong Location & Underselling
The first aim of every business is to bring in enough revenues to turn a profit. If there is no demand for your product or service, your price point-value proposition is unbalanced, or your physical outlet is too far “off the beaten track” – you won’t generate enough sales to stay afloat (let alone make money!).
Especially for businesses that rely on the patronage of returning customers, such as restaurant and spa industries, it is important to create the perfect marriage of an offering that is: a desirable product/service, at the right price, at an accessible and comfortable location. For business continuity and growing revenues, you don’t want to be just a short-lived fad, a “one-purchase, one-snap Instagram wonder”. Instead, you need to create a something, a somewhere, an experience, a taste, that customers will want to come back to enjoy (and purchase) again and again.
Another issue to be aware of as a new business owner without a strong track record, is to not sell yourself short and undermine your value. If you start off too low, it is hard to elevate yourself beyond the image you have inadvertently created as being low-value, inexperienced and desperate for a sale (and therefore, more vulnerable to accepting lousy credit terms and giving away things for free). Instead, target to swiftly acquire the ability to negotiate terms that reflect your true value, and that are in line with current market rates and demand for your service or product.
- Overspending Start-up Capital
It is not unusual to see a beautifully decorated restaurant or well-stocked retail store crash and burn within months of its opening. Likewise, we see this with great tech concepts – launched with much excitement; only to suffer the same fate as Icarus. This happens because many entrepreneurs – while the have deep technical knowledge – have inadequate knowledge of how a business operates, how to forecast sales and running costs, and how to manage staff and resources. Thus, they find themselves quickly depleting their startup capital before their cash flow is positive.
Rather than just celebrating the achievement of “getting off the ground”, it is important that entrepreneurs also thoroughly research and plan for the next steps of their journey.
- Insufficient Working Capital & Poor Cashflow Management
Following on from point 3, above, trouble can also hit new businesses that do not have sufficient working capital to cover their daily operational expenses and manage staggered credit terms, or to set aside for re-investment in the business or to use as a buffer for contingencies.
It is important to be prepared for unexpected circumstances such as:
- The loss of an important customer/major contract;
- The loss of a critical employee – such as a key performer in management or in sales;
- An increase in the cost of labour, rent, raw materials, utilities, and license fees; and
- The arrival of a new competitor, or the saturation of providers in your industry (resulting in a price war) that can reduce your revenues and margins.
In a nutshell, working capital is the net amount you are left with after accounting for your current assets (mainly trade receivables and inventory) and after deducting your current liabilities (eg. trade payables, business loans, hire-purchase financing).
Insufficient working capital at worst can jeopardise your business and at best undermine your negotiating power. Without proper cashflow management, entrepreneurs can find themselves unable to meet their Company’s debt obligations and spiraling into insolvency. On (or, in!) the other hand, having enough working capital allows a Company to take advantage of cash and trade discounts from suppliers and be able to extend credit terms and special promotions to customers (ideally, attracting more sales).
So, our big tip to you on this major reason for business success or failure in the long run, is to make sure you have enough reserves in the company’s coffers to carry you through tough times and seasonal slowdowns, and to leverage beneficial business terms. Additionally, include contingency measures in your business plan for alternative revenue streams and financial resources, as well as for business development, product/service modification, and intensified marketing. A business that can adapt quickly, stays afloat!
- Failing to Track Your Finances Closely
Continuing along the same financial theme as the reasons for business failure above, you cannot control your cashflows, allocate resources wisely, and manage your business effectively with “bad” numbers (i.e. estimates, inaccurate accounting) or, indeed, with no numbers at all!
Make it a habit to keep careful records of all the money coming in and going out. Be especially careful when borrowing money, taking out an LC, and extending credit terms to your customers not to wind up in serious debt.
At the end of each financial year, outsource the preparation of your financial statements to a qualified external accountant who can advise you about your business’s performance and any areas for concern.
- Underestimating the value of referrals
Repeat and referral business is critical for most businesses. If you do not deliver excellent and timely sales and support services on receiving a referral, chances are you won’t be getting many more! It’s important to make the most of every opportunity you are given and to see them as the gateway to new opportunities. Even if your product or service does not immediately win over a potential client, your professionalism and solutions may be later called on for friends and contacts.
- Lousy Customer Service & Sub-par Employee Engagement
Further to Point 6, the major factors that contribute to poor customer service and overall employee incompetence include: a lack of focus, vision and planning by the management. Neglecting to monitor quality standards and set direction will quickly sink your business. To ensure your employees deliver good customer service, you need to provide them with adequate training on product knowledge and service delivery. Furthermore, it is important to recognize the efforts and contributions of key employees. By promoting and empowering star performers, junior employees are motivated to succeed where they see a clear path to their own advancement. This again, ties back to management having a strong and consistent vision for the company, including fostering the ambassadorship of the company’s brand, products and services.
- Dominated by the Competition
Standing out from your competitors requires a two-front attack:
- Building awareness of your brand, products or services; and
- Retaining the customers that you’ve got.
If consumers don’t know you exist, can’t find you easily, or cannot get the information they need about your products or services to make a purchasing decision; then it is unlikely you will have many new customers! Small businesses have the advantage that they do not need to spend a lot of money on huge international marketing campaigns – instead, you will find that an easily navigated website (which you can build yourself using, eg. WordPress, Squarespace) and active social media engagement (including on: Instagram, LinkedIn, Twitter, and Facebook) can take you a long way in building product and services awareness, building brand allegiance, and promoting special offers.
In today’s world of instant gratification and information access, customers are savvier and more specific about what they want, what they want to pay for it, and when they want it. The cost of switching from one brand to another, or from one provider to another, is very low. Enduring loyalty and commitment when a relationship (or a product or service) has become less than ideal is now a concept from the past. To keep your customers, you must earn their trust and make them feel that they have made the right choice in choosing you. (For younger consumers, this might also involve publishing your CSR and eco-friendly initiatives on your website). Keep an eye on your competition to see what incentives they might be offering, that could sway your customers to swap sides. Ensure that you are not falling short in your delivery – if you don’t take care of your customers, there are plenty of other businesses that will!
- Overhasty expansion
While many companies dream of scaling up quickly, hasty over-expansion can be a serious misstep that undermines the continuity of your founding business. Moving into markets without sufficient research and planning – just to be the first to market; heavy borrowing to keep growth at a specific rate, and increasing fixed costs (such as rental and staffing) are all possible moves that can cause you to critically drain your financial resources. Instead, it is better to begin with a narrow, concentrated focus on your business operations and to expand later when you’ve got your business model ‘right’, and there is a genuine need to do so, i.e. to lower productions costs, be closer to key markets, and to have ready access to raw materials.
- Too Conservative & an Inability to Adapt
Converse to the point made above, business owners that stubbornly hold on to outdated beliefs, past ‘wonder products’, and ineffective approaches, or who are (too) risk or conflict adverse, will find that they miss out on a lot of sales opportunities and transformative growth. It is good to be realistic, and not too ambitious (as highlighted above), but it is a fact that running a business always comes with risk – and adventure! You cannot control every outcome in running a small business.
You need to become braver and more comfortable with uncertainty, while building up, adapting, and relying on your core competencies.
The flexibility to adapt with changing circumstances, demand, and modernisation by developing different products and services to meet client needs, an openness to change your management style and accept new ideas from young contributors, and a ‘can do’ positive attitude, will also help to propel your business forward. Optimism is contagious, and will be shared by your employees and clients alike.