The 8 Most Common Causes of Failure in Business

The 8 Most Common Causes of Failure in Business

Small and medium sized businesses (SME’s) are essential to both national and global economies. They provide incomes and employment for vast numbers of people, figures from 2017 showed that the SME sector in the UK employs 16.1 million people. The importance of SME’s to the economy means that there are a wide variety of supports available to potential entrepreneurs in the process of growing their company.

It is an unfortunate fact, however, that for a number of reasons, many of these companies fail. Statistics show that up to 55% of new businesses do not survive more than five years after company incorporation. You as a business owner do not want to become just another statistic on this list.

This article describes the main difficulties and pitfalls that contribute to business failure; by knowing what these are you can work to avoid them in order to ensure that the company you form grows to be strong and successful.

1. Failure to plan ahead

If you are starting a business, the first thing you should do is to complete a detailed and comprehensive business plan. A Good business plan will define;

  • What exactly your business is.
  • What the goals and objectives of the business are; in the short, medium and long-term.
  • What steps are needed to achieve these goals and objectives.

Failure to complete a business plan can have a negative impact on the future of your business. If you do not have specific and measurable goals within set timelines for the business then you will not be in a postion to monitor the progress of your business effectively and are more likely to fail.

2. Inadequate Market Research

Analysis of the market: It is very difficult to create a successful business selling a service or product if you have no awareness of who your exact market is and what they are likely to spend money on. Market Research can be done by questionnaires or focus groups to establish;

  • If there are enough people who are likely to buy your product.
  • How much they are willing to pay for the product.
  • What is it exactly that they want.

If you do not carry out adequate market research, you may find yourself trying to sell a product or service that nobody wants to buy.

Analysis of Competitiors:

Market research also includes finding out as much as you can about your business competitors. You need to know:

  • Exactly what it is your competitors are offering.
  • How your product or service differs from this.
  • What your competitors are charging for similiar products or services.

Without this information, you may end up charging too much for your product and nobody will buy it or charging too little so that your profit margins are not high enough to ensure the viability of your business.

The analysis of your competitors will also help you to discover whether your product or service has a Unique Selling Point (USP). The USP is the factor or factors that make your business different from that of your competitiors. It is essential for a new business trying to enter an established market to have a USP, otherwise, there is no reason for customers to buy your product or service instead of those already on offer from more established businesses.

Businessman doing financial planning

3. Financial Mismanagement

Strong Financial Management of your business is essential. Without the necessary financial stablility your business is sure to fail. The most likely financial causes of business failures are :

  • Inadequate Working Capital – A certain amount of working capital is required to establish a business. This can be attained from a variety of sources including (personal money, friends and family, grants, microfinance, business loans, crowdfunding). Wherever the funds come from they need to be sufficient to both start the business and to provide a contingency for unforeseen difficulties that may arise in the early days. Failure to ensure there is adequate financial resources in place at the beginning may cause your business to hit a wall and fail quite quickly.
  • Lack of Access to Credit – It is likely at some stage in the life of your business that you will need access to credit, whether it is in the form of a bank overdraft or a longer term loan to buy equipment or expand. If you do not have access to this credit,your business will be in trouble. To guard against this problem, always maintain a good credit rating for your business.
  • Bad Debts – In some types of businesses, it is necessary to give credit to customers. If you are in this situation, make sure you always know exactly how much your are owed and by whom. If your customers fail to pay on time, this can have a negative impact on the financial situation of your business.

Have specific and appropriate policies in place to deal with late payment of debts and if necessary change your terms of agreement with debtors who are consistently do not pay in time.

  • Lack of knowledge of Sales and Profit Margin Figures – If you do not keep proper account of your sales figures, you will not know how much you are selling and whether or not you are meeting targets required to maintain the viabilty of your business. You also need to monitor your profit margins at all times so you know if you aremaking sufficient mark- up to pay outgoings and to make a profit.
  • Cashflow Problems – All of the above factors need to be minded to ensure that there is sufficient cashflow in your business at all times, to pay your overheads,(rent, rates,utilities, wages) and to purchase new stock. It is a definite that without adequate cashflow, your business will fail. Cashflow projections need to be done regularly in order to know exactly what the requirements of the business are and to foresee any potential cashflow problems that may be about to arise.

4. Inadequate stock control

Inadequate stock control can cause problems for your business in two ways;

  1. Excess stock can lead to essential cash being tied up, to unnecessary extra storage costs or cause the problem of stock going out of date or becoming obselete.
  2. Too little stock may cause you to fail to meet customer requirements thus losing out on valuable sales.

Here again, the emphasis is on planning and projecting so that you can predict accurately what amount of stock you will need and when.

5. Bad S+C

A positive relationship with all of your customers is essential for a number of reasons;

  • Customer Satisfaction – If customers are satisfied with your products or services, they are more likely to return and purchase again. Satisfied customers are also more likely to recommend you to others, thus expanding your customer base.
  • Customer Reviews – In recent years, the culture of reviewing businesses has grown, there are specific review websites for many types of business e.g TripAdvisor which reviews businesses in the hospitality industry and also customers regularly use their own social media sites to give reviews. It is important bear in mind that people are much more likely to tell others about their experience of your business if it was a bad one. One or two bad reviews can do untold damage to a business so you need to ensure that your customers always have a positive experience with your business.
  • Customer Feedback – It is necessary for the health of your business,to know what your customers want, if customers are telling you that they particularly like or do not like aspects of your business, then you need to be listening and to adapt your business accordingly, failure to do so can lead customers to buy elsewhere and without customers, you have no business.

Digital marketing trends

6. Not Keeeping Up to Date with Developments

If you do not keep yourself up to date with changes and developments and regulations in your industry and business area, then it is likely that you may fall behind your competitors and your business may fail. Take time to educate yourself, read journals and articles that are respected and relevant in your business area to ensure that this does not happen.

7. Lack of Leadership

A Good Leader has the ability to;

  • Communicate their vision to staff and others around them and inspire them to work towards a common goal.
  • Persuade potential investors of the value and worth of their business
  • To convince customers that they want or need the product or service that the business provides.
  • Will trust themselves to make wise decisions that will benefit their business and will trust and delegate appropriately to their team.

Without these attributes, it will be difficult to build a thriving, successful business, so if you are in business or starting up, you will need to work on developing them to protect against failure of your business.

8. Poor Marketing and Advertising Strategies

If your potential customers are not aware of your existence, then it will be very difficult for you to sell your product or service. If you use the wrong form of advertising and do not hit your target market then not only will you not make the sales but you will also lose the money you have spent on the wrong form of advertising.

If you choose print media to advertise, it can be quite expensive, but if you have an older more conservative target market it may be necessary, if you have a younger more computer literate target market then it is much more sensible to advertise via social media as it is cheaper and reaches a wider audience.

If you are selling online, your website must be attractive, engaging and easy to navigate. A poorly designed website will not hold a potenial customers interest for long, if they cannot quickly find what they are looking for, the customer will move on and you will have lost them.

Failure to analyse the performance of your website is a mistake, by using tools such as Google Analytics, you can quickly see, who is visiting your website and whether visits are converting to sales. The lack of this information, means you will not take the appropriate action to improve the situation and this is bad for business.

Female entrepreneur working outdoor

Knowledge of all of these potential problems and pitfalls related to setting up and running a business,will help you to protect your business from failure by enabling you to take the necessary precautions and put adequate safeguards in place to make sure you do not make these mistakes, but instead build and maintain a healthy, viable and sustainable business.

Related Post

Leave a Reply

Your email address will not be published. Required fields are marked *

The business world should not be boring. Agreed?

If you say “Absolutely!” please sign up to receive weekly updates from the extraordinary world of business, hand-picked from the web just for you.