Researches carried out by various people and organizations over the years revealed several reasons why businesses fail.
Business failure is not something any entrepreneur will want to experience.
This article is, therefore, focusing on the most common causes of business failure and steps you can take to save your business from failing.
Why small businesses fail: Wrong Choice Of Business
Going into any business in which you have no skill, training and experience can result in business failure.
For example, you cannot run a pharmacy business unless you are a pharmacist. You cannot run a hospital if you are not a doctor.
In other words, you should not go into any business just because you like the idea. Or that you see people succeeding in that business.
Therefore, you need to have the necessary Training, Skills And Experience needed to succeed in any business before you go into it.
Why small businesses fail: Lack of Research
Some people just go into businesses without researching the business idea.
Yet others start businesses without having enough knowledge of the nature of the business they are going into.
Researching the business idea is very important because of the following reasons:
- You need to understand the industry
- There is need for you to ask yourself whether you have what it takes to succeed in the business.
- You need to know the level of competition in the market
- Also you need to know your target customers
- And their tastes, preferences and buying habits
Furthermore, you can get some useful information from the internet, business newspapers and magazines.
Additionally, you should not be shy to ask people relevant questions about the business.
Some people much done that business before and failed.
Others must have done that business and succeeded.
You need to find out what happened, the difference and what you can differently.
Why small businesses fail: Wrong Business Location
If you locate your business in a wrong place, you are not likely to succeed.
A wrong business location can make it difficult for you to keep your existing customers and get new ones.
For example, if you are selling automobile parts and you locate your business in areas known for bookshops, you are not likely to succeed.
The following tips can help you to:
- Put your business where everybody can see it.
- locate where there is good population
- Make sure that it will be easy for customers to come in and buy.
- You should also locate your business where there are basic facilities, such as electricity, water, good roads and security.
Low startup capital
Insufficient startup capital is yet another reason why businesses fail.
For instance, little startup capital can affect your small business in many ways, including:
- You will not be able to buy stocks in large quantities.
- It will be difficult for you to get trade and cash discounts
- Your business cannot compete in the marketplace
- And it will be difficult for your business to grow
- You cannot take advantage of sudden business opportunities
- Obtaining loans from bank will be very difficult
Therefore, to avoid business failure, you should make sure that you are able to raise the appropriate amount of capital before you start your business.
Why small businesses fail: Lack of planning
As Benjamin Franklin puts it, “if you fail to plan, you are planning to fail”.
Many businesses fail because of improper planning.
Planning can enable you to:
- Remain focused on your vision for the business
- You will have a working document you can always refer to
- identify likely future problems
- Find temporary solutions to them
- Work out where you want your business to be
- And when you hope to get there.
There are many methods you can use to collect relevant data for planning purposes.
You can gather data for planning purposes from the following sources:
- Oral or personal interviews
- Personal observations
- The internet,
- Industry journals, books and other sources.
Therefore, to prevent business failure you should make business decisions based on facts and figures. Do not guess.
Why small businesses fail: Bad Management
Bad management is yet another reason why businesses fail.
The following tips can enable you to manage your business properly:
- You should work out good policies that should guide the internal running of your our business
- It is your duty to set standards which your employees should follow.
- You need to hold meetings with your senior staff regularly to see if any of them has good ideas that can move your business forward.
Most importantly, you should bear in mind that the success or failure of your business depends on the choices and decisions you make.
Why small businesses fail: Poor Cash Management
Poor cash management is another reason why small businesses fail.
For example, some business owners mix their personal expenses with business expenses.
This can make difficult for you to know the direction your business is going to.
Moreover, to succeed in business you need to maintain positive cash flow.
For example, if the amount of cash flowing into your business is consistently less than cash outflow, you business is likely to fail.
Therefore, you should never allow negative cash flow.
In addition, failure to create cash budget to track your business incomes and expenses can fail your business.
A cash budget can help you to run your business in a reasonable manner.
Most importantly, you should ensure that you prepare bank reconciliation statements for your bank account[s].
Therefore, if you do not want your business to fail, you should learn how to manage your cash effectively and efficiently.
Poor Personnel Management
Poor personnel management is one of the reasons why businesses fail.
Your employees are your assets because they play various important roles in your business.
Remember that in business, it is people that make a business to succeed or fail.
Furthermore, to get the best from your employees, you must treat your employees well.
The following guidelines might help you to keep your employees happy:
- Pay your employees salaries according to the the work the do for you.
- Also do not delay their salaries
- Allow them to take annual vacations
- Give promotion and pay raises to those who deserve them
- Train and retrain your employees
Remember that the quality of services you receive from your employees depends on your input into their training and welfare.
Why small businesses fail: Insufficient marketing
Many businesses fail because of Insufficient market
Many small business owners just seat down in the comfort of their shops waiting for customers to come and buy.
To avoid business failure, you need to advertise and promote your business on regular basis.
You should advertise your business on local radio and television stations.
In addition you can also advertise your business on the social media such as:
- Face Book,
- twitter and other
Most importantly, when you advertise, remember to insert your contact details in all your outgoing adverts materials.
Examples are email address, telephone and location address.
Poor stocks management
Poor stock control can make your business fail.
There have been reported cases where employees make away with stocks on regular basis without paying for them.
This happens mainly where internal control is either non existent or not effective. Or stock records are kept manually.
Furthermore, others recycle stocks back to suppliers at half their selling prices.
Such employees later go back to the suppliers to collect the money for the stocks and use it for themselves.
Therefore, no matter the size of your business, you should put in place a good internal control system to track your stocks.
A computer soft ware is a good option.
Why small businesses fail: Poor customer service
Poor customer service can scare away your customers.
If you give your customer excellent customer service, they will continue to buy from you.
Do not allow any customer to leave your shop unhappy.
Unhappy customers can spread negative news about your business.
Consequently, negative news about your business can make your business to shut down.
Why small businesses fail: Not Keeping Financial Records
Your business can fail if you do not keep good accounting books and records.
For example, you need to keep records of every Naira/dollar you receive or spend.
In business every Naira/dollar counts. They add up at the end of the year.
Accurate financial records will enable you to prepare your annual accounts.
Annual financial statements will let you to know the direction your business is going.
Furthermore, keeping proper accounting records can help you to plan for the future of your business.
In addition, you will be able to know the net worth of your business.
Poor electricity supply
Poor or no electricity supplies is one of the major causes of small business failure.
For example, banks, petrol filling stations and many other businesses run power generating sets almost throughout the day to power their businesses.
Consequently, using generating sets to power a business is a most expensive thing to do.
And such costs reduces their profits and retard the growth of their businesses.
Although the big businesses may be able to navigate their way to profitability, the small businesses are usually the hardest hit.
Another factor that negatively affects both big and small businesses is the activities of smugglers.
Smugglers pass through the back door to bring in, at cheaper prices, foreign that are even more superior to the locally made products.
Consequently, buyers often go for the high quality products, leaving the local businesses unable to sell their wears.
And this makes it difficult for small businesses to compete or make profits.
Poor leadership can make your business fail.
It is your responsibility to provide an effective and flexible leadership approach that can carry your employees along.
Furthermore, you should be able to let employees know the direction your business is going.
do not need to be sure that you let your employees know the direction your business is going.
You must be able to make the right decisions that can move your business to the next level.
The most successful entrepreneurs learn, study and reach out to mentors to improve their leadership skills.
Lack of creativity
Lack of creativity can make your business fail.
Some business owners simply do not make efforts to develop unique products or modify existing products.
It is your responsibility to be able to look out for products that are different in some respects from those in the market.
Thus differentiating your products can enable you to fight competition.
Remember that in other to beat your competitors, you must know more than them.
Therefore, you can try to bring to the market, products that can keep your customers engaged.
Ignoring customer needs
Failure to pay attention to the needs of your customers can make your business fail.
Although every business will tell you that the customer is #1, but only a small percentage of businesses actually act that way.
Furthermore, businesses that fail are those that lose touch with their customers.
Find out if they still love your products:
- Do they want new features?
- What are they saying?
- Are you listening?
To prevent business failure you should not ignore the needs of your customers, especially the regular customers. It’s key to have a clear definition of the services you offer.
Inability to learn from failure
Everybody makes mistakes. In business, sometimes we fail for one or multiple reasons.
Unfortunately, many business owners do not learn from their failures.
Furthermore, you should remember that failure is an opportunity to try harder.
Most importantly, you should also remember that many businesses have failed several times before they were able to find their feet.
Creating too many branches
Creating many branches is a good thing if and only if it is done at the right time.
However, if you scale your business too quickly and too early, you can destroy your business.
For example, in Nigeria just over a decade ago many banks created branches here and there.
But not too long after, some of the branches were found to be unsustainable.
Consequently, the Central Bank instructed many banks to merge.
Therefore, you should not scale your business unless you are ready and you know what you are doing.
Lack of profit
A large number of businesses fail because of their inability to make profits.
As an entrepreneur, you must always think of how to increase your sales and hence profits.
You need to make profits so that you can remain in business.
Lack of focus
Similarly, a lot of small businesses fail because their owners lack focus.
They fail to define their competitive edge and lose out in the competition.
Without focus, you it will not be able to keep your business running at optimal levels.
Therefore, to keep your business up and running you must have focus, direction and drive to succeed.
Why small businesses fail: External factors
There are many external factors that can make a small business to fail.
- natural disasters
- exchange rate fluctuations
- and lots more
Although some of them may be beyond your control, you can control their impact on your business.
No succession plan
Failure to have succession plan can make your business fail.
For example, you can plan ahead for the person that will succeed you when you retire or pass on
Therefore, your business need to map out processes to fill vacancies brought about by:
- unexpected departures,
- or deaths.
Lack of mission statement
You need to have a mission statement that will state the in clear terms why your business exists.
Furthermore, it should describe your target market and the services/products you are offering.
Finally, your mission statement, in just a few sentences, can communicate the essence of your business to your employees, customers and the general public.
You are not accountable
You should remain accountable to your business, despite the fact that the business belongs to you.
Treat yourself as an employee. Set measurable goals and hold yourself accountable.
Educate yourself about the wide range of options and technologies that are available.
Simply put, what you get out of your business is a function of what you put into it.
If you are only willing to put in a few hours a week, expect to get a few hours a week of income too. There are no two ways about it.
Not connecting with mentors
Failure to connect with your mentor and networks can make your business fail.
When you connect with your mentors, they will make available to you their wealth of experience, because they have been there before you.
Therefore, connecting with mentors can help you to know some of the things it takes to be an entrepreneur.
Failure to get others to believe in you.
If you must succeed as an entrepreneur, you must be great at selling your vision.
You might need to convince vendors, partners, landlords, investors, employees, or a list of more people that you are someone they can comfortably do business with.
Not prepared to fail
Do not be afraid to fail. Expect failure but don’t fear it. Think of it as a normal part of your business. It is necessary because it:
- prepare you to face difficult times.
- teaches you many useful lessons.
- helps you to make better decisions the next time.
Remember that failure is an opportunity to try harder. Do not quit because, in business, quitters do not win and winners do not quit.
Failure to focus on your customers
Your customers are your boss. They can keep you in business just as they can, as well, put you out of business.
Furthermore, remember that customers do not disappear; instead they take their businesses to your competitors.
Ask them questions to find out what they like or dislike about doing business with you.
Finally, you should work on the feedback you get from your customers. Negative feedback gives you a chance to improve.
Inability to make profits
Your business needs to remain profitable to succeed.
The lack of profits can put you out of business, even if you have record sales.
Why small businesses fail: Credit sales
Selling goods to customers on credit basis can fail your business.
It is good to be successful but it is better to remain successful.
However, to remain successful, you need to increase your sales and grow your business.
Most importantly, you should be careful in selecting customers you will grant credit facility to.
Better still, if possible, you can avoid credit sales altogether.
Not preparing for the unexpected
If you will succeed in business, you must figure out how to deal with the unexpected.
For example, if your best salesperson quits tomorrow?
How long will it take before you can replace her?
And how can you be sure that the next person you are hiring will be able to sell?
You need to have a system that can help you to recover from unexpected events.
Effective systems are crucial to quick recovery from a disaster.
Formal procedures are key. Identify the key parts of your business and think about what it would take to recover losing any of them.
In conclusion, it is true that some businesses actually fail.
It is also true that some of them do succeed.
Entrepreneurs who lead businesses to success understand that it takes a carefully planned and executed strategy to succeed in business.
Most importantly, if your business fails or is threatened, do not quit.
In business, winners do not quit. Those who quit do not win.
After all, you can blame a man for falling you but you cannot blame anybody for failing to get up.
By Samuel Ijenhi
B. Sc. Accounting [University of Benin]
Benin City, Nigeria
Founder: Ijenhi Business Solutions.