Running a business is very risky. In fact, an estimated 49% of businesses fail within their first five years and approximately 30% of businesses don’t even make it through the first two years. Some industries are particularly risky and have even higher failure rates. For example, about 61% of independent restaurants don’t make it through their first three years, and the failure rate for technology startups is about three times higher than that of all other businesses.
These statistics may not be very encouraging to new entrepreneurs. But Chance only plays a small role in a business’s fate. Most fail due to lack of direction, poor planning, or poor leadership, even if the idea, product, or service is a winner.
So how can your business avoid failure? We’ll take a look at common problems and real-life examples of business failures to find out.
A business model is the method by which a company develops and creates value for its customers. It is an essential element of the company’s core strategy. However, if the business model isn’t solid or is fraught with problems, the business is inherently at risk.
Some problems in a company’s business model may include:
A bad business model can ruin a good company. Businesses need to thoroughly understand what their customers want, and how to efficiently produce and deliver their products or services. The key to avoiding a bad business model is to invest the time and money in solid research and planning.
You’ve heard that attitude is everything. Well, it may not be everything when you go into business, but the wrong attitude can certainly ruin everything in spite of the best laid-out plans.
Some entrepreneurs go into business because they are passionate about the product or service they want to offer. While having a passion is extremely important to making a business successful, unfortunately, passion alone isn’t enough.
A mentor once shared a story with me about his brother who had a passion for parrots. He thought the rest of the world must also love parrots, so he decided to start a business that specialized in selling parrots. He was disappointed, however, when it didn’t turn out to be as successful as he had hoped.
His mistake was in identifying his target market. Or rather, in misidentifying it. He didn’t realize he’d have to take extra steps to reach other parrot lovers since he assumed that everyone felt the same way he did. Fortunately, he changed his mind about selling parrots and started a dog-washing business instead. Since this was a service that appealed to more of his target market, he ended up making more money.
Doing what you love is important, but it cannot be your only consideration for starting a business. Profits need to be a primary objective in order for any business to survive. If passion gets in the way of a proper business model or planning, it can be downright destructive.
That said, the right attitude is an unbiased one. If you can objectively examine what is likely to work and not to work according to your research and not your emotions, your Chances for success are that much higher.
successful companies make sure they have all their ducks in a row before they ever open shop, which means the research and planning process often takes months. Here are some questions to be answered before a business is launched:
Some businesses are run by individuals who have a great concept, but lack leadership skills. The following traits are often necessary to lead a company to success:
Managing cash and financing is key to keeping a business alive. If companies don’t have the finances to pay their bills, they will fail.
Many businesses don’t realize how much money they really need to keep their company going. They may be wise to try “bootstrapping” their companies on a limited budget. However, successfully bootstrapping a company requires carefully monitoring finances.
Sooner or later, bills need to be paid and companies that are unable to do so end up filing for bankruptcy. It is essential that business owners have an idea of how much they are going to spend ahead of time and prepare accordingly.
Obviously, the goal of a business is to maximize sales and profits. But even then, running a profitable business does not necessarily guarantee survival. Many businesses have high sales volumes and healthy profit margins. However, problems can arise when a lot of these sales are on credit. The business must wait to get their money and some customers are likely to default on payment.
In the meantime, the business’s bills continue, most of which probably require cash. Therefore, if businesses don’t have a healthy amount of cash on hand, they can go bankrupt rather quickly. Moreover, if a business brings in many sales on credit, it may need to find a cash supplier to pay the bills while waiting for their customers to make good on their loans. Cash is king after all.
Economic factors can be some of the hardest to deal with because entrepreneurs often feel powerless to do anything about them. Though this isn’t necessarily the case, a poor economy can make survival much more difficult. Some common economic issues to contend with include:
When consumers have less money to spend, businesses suffer. This creates a domino effect that touches almost every business. Recessions come and go, but particularly bad ones will be devastating and collapse many businesses in their wake. Those that survive Generally find ways to operate on a leaner budget and offer value to their clients in spite of a rough economy.
One mistake a business can make is in cutting their prices substantially during poor economic times. This can reduce profit margins such that if sales drop further, meager profits morph into devastating losses. It can be more advantageous to add greater value to products or services at the same price point instead of lowering prices.
Market trends often change and fads come and go. Some businesses fail to adapt to changing customer interests and expectations, which means at worst their entire line of products could become obsolete. In this case, a drastic change in the business structure and model may be necessary. But this is too often a change that many businesses are unwilling or unable to make.
The infrastructure of a business can change as well. For example, IBM found itself in a position where it could no longer compete in the PC industry it once dominated. Fortunately, the company was smart enough to adapt its core business strategy and find a new market. This is something that many businesses are unable to do. They end up either willingly closing shop or being driven out of business.
Legal problems can be extremely expensive and can lead to a forced business closure or even bankruptcy.
Businesses are at risk from all angles here. For example, a lawsuit that ensues from a customer slipping on a floor can cripple a company, regardless of whether the business wins or loses. Or a business may be shut down for violating government statutes, such as health code violations or SEC regulations.
In addition to court costs themselves, legal battles can have lasting repercussions. After a business has been sued or prosecuted for an injury, they may lose trust with customers, creditors, and employees, and be required to pay more in the way of operating expenses, such as insurance.
Businesses are also vulnerable to changing government regulations. If the government decides to be stricter about certain practices, they may enact policies that will increase the costs for many businesses. These practices are not intended to drive companies out of business and most will survive just fine.
However, some businesses may be more vulnerable to such changes due to their size or the way they operate. Combined with other factors, changes in government regulations may cause or contribute to a business’s failure.
Although small businesses have a high failure rate, large companies can go bankrupt as well. In recent years, large company failures include:
Even if a business is doing well on most levels, one major problem can lead to its decline. Or a combination of multiple minor problems can end up being too much for a business to handle. It is difficult to be one of the few that survives; it takes capable leadership, adequate financing, well-defined goals, effective business practices, and more than a little bit of luck.
An old business professor of mine once told me to think of a business like a car. If one part stops working, the whole thing can come to a halt.
What are some other reasons why businesses fail? Have you experienced any of these first hand?
Kalen Smith has written for a variety of financial and business sites. He is a weekly contributor for Young entrepreneur and has worked as a guest blogger on behalf of Consumer Media Network. He holds an MBA in finance from Clark University in Worcester, MA.