Understanding the reasons why businesses fail, can be a helpful way of identifying where you are in your business lifecycle and helping you put plans in place to avoid becoming a failed business statistic. Over the past 50 years there have been many studies that look at the issue of business performance in a bid to to better understand why some businesses fail and others succeed. Reasons for business failure can be classed into two general groups, namely internal factors and external factors.This article focuses on owner managed businesses and looks at internal factors only as these are usually within the control of the business owner.
So, here are our 10 reasons why owner managed businesses fail.
1.Lack of Industry Experience
Every business has an industry and business environment in which it operates. In order to succeed, the internal resources and skills within a business must match the needs of the industry or environment in which the business operates. Lack of relevant experience or skills in a business can lead to poor organization of a firm and its resources and subsequently end up in business failure.
2.Inappropriate and Inadequate Financing
Financing is the bedrock of any business growth, whether in the startup phase or in a later stages of the business life cycle. For many failures it is not just the lack of finance but also the use of inappropriate financing. For example, using short term sources of finance for long term projects can lead to trouble. Proper financial planning involves looking at various sources of funding and understanding the costs and benefits of each source as it relates to your business or project and opting for the mix that best supports your strategy and growth plans. Proper financial planning also demands that you look well ahead , rather than looking for financing just when needed. This way, even if things go wrong, there is a contingency plan in place.
3. Insufficient Cash Flow
Cash flow is the lifeblood of any business and determines the businesses ability to meet its running expenses for its day-to-day operations. Many owner managed businesses fail because owners have not taken the time to understand what cash will come in every month/week/day , and thus, how much they can afford to spend or borrow. Proper cash flow plans will tell when there will be surplus and this should prompt planning for how to invest the surplus and when there is a deficit in the plan it should prompt plans to source appropriate funding.
4.Poor Business Plans
Many businesses fail because they have not prepared a plan. This can be likened to starting a trip without having a destination and without knowing if you will travel by land sea or air or what you will do if something goes wrong. A good business plan helps identify the mission, the target customers, competitors, cost structure, external influences, and strengths and weakness of a business. A proper plan builds in contingencies to help mitigate the impact of known risks within the business environment or industry.
Many business failures are associated with management inexperience or incompetence. Sometimes it is failure to have a business strategy and sometimes it is failure to implement the strategy. Michael Gerber famously coined the term, “working on the business, not in it”. By this he meant that it was essential to make the time to put back from the rock face and take responsibility for the key strategic decisions.
6. Ignoring the Competition
Competition can have an adverse impact on prices, customer base and on profits. In tough times, competition lead to self destructive price wars that are not good for business. Businesses that carry out a thorough competitor research are in a position to understand the strengths and weaknesses of their competitors and craft strategies to compete against them. It is important to remember that customers are always looking for the best deal and if the competition offers something better in terms of products, services, or prices, you may lose your customers. Keeping an eye on competitors and positioning the products accordingly is vital to staying in business.
7. Unrealistic Goals
Sometimes the goal setting and planning in a business just become an exercise in ticking the boxes. For example, a business that is planning to double its sales but has not looked at the impact on the sales force and the time it will take new sales people to get up to speed may be setting the sales force up to fail. It is one thing to set goals and another thing to set realistic goals. Realistic goals should be challenging but achievable and matched by appropriate incentive and rewards for those who achieve their goals.
8. Overtrading or Uncontrolled Growth
Uncontrolled growth of a business can also cause it to fail if not handled appropriately. the accounting term is “over trading”, and this can lead to issues such as too much debt and too little cash. Overtrading usually occurs when when companies expand their operations too quickly and then enter a negative cycle, where they may have acquired too much debt and become overburdened with high interest charges. this leads to lower profits, tight cash and more borrowing as the situation spirals out of control. Overtrading eventually leads to business failure as cash dries up and creditors call in the receivers.
9. Wrong Location
For some businesses the adage -location, location, location is critical. In the retail sector, even the best brands will struggle if they have the wrong location. Location is not just about the geographic placement but also includes other factors such as business rates, local taxes, competition and so on. Businesses that don’t get their location right in may never reach their full potential and all it takes is one adverse event to tip them over. the growth in e commerce has reduced the significance of location for a number of businesses such as travel agents but for many in “Business to Customer” (B2C) sectors they need to get their location right.
10. Weak Systems and Controls
Without proper systems and controls in place, it is impossible to manage a growing business. it is business systems that bring everything together so that they work as a united whole. Controls enable management to monitor activities and measure performance. A business may not be able to control the external factors affecting its environment such as customers and competitors but it can adapt its internal systems and organisation to the requirements of the environment. A lack of strong control and systems can lead to business failure. Controls can be implemented in different parts of the business to control resources such as cash, employee productivity, inventory controls, credit controls and so on. Controls can be set in place to measure the actual business performance against the business plans or targets and where results are below plan, to help drive remedial actions.
When addressing the reasons for business failures within owner managed businesses, it is important for owner managers to understand what their strengths are and what their weaknesses are. With this understanding, owner managers can work closely with external advisers who complement the areas they are weak in.