Why is it that so many businesses fail while so few succeed?
One of the great mysteries of entrepreneurship is why businesses fail. Some people start one successful business after another while others fail to succeed.
Why some businesses fail while others succeed?
The worst part about a failing business is that the entrepreneur is unaware of it happening until it is often too late. It makes sense because if the entrepreneur really knew what he was doing wrong, he might have been able to save the business. Some entrepreneurs live in a land of denial while others are unaware of their mistakes. I recommend you read Failing Forward: Turning Mistakes into Stepping Stones for Success, a great book about going from mistakes to success.
One thing for sure, a business almost always fails because of the entrepreneur.
“It’s not the plan that is important, it’s the planning.” Dr. Graeme Edwards
There are over 28 million small businesses in the United States, according to the SBA.
It’s an impressive number. The sad reality is that only about 50% of them survive. What’s worse is that only about one-third survive 10 years or more. The life of an entrepreneur is unforgiving. It is a constant challenge. There are many moving parts. Any one of them could put you out of business.
Businesses fail for many reasons. The following list includes some of the most common reasons:
1 – Lack of planning – Businesses fail because of the lack of short-term and long-term planning. Your plan should include where your business will be in the next few months to the next few years. Include measurable goals and results. The right plan will include specific to-do lists with dates and deadlines. Failure to plan will damage your business.
2 – Leadership failure – Businesses fail because of poor leadership. The leadership must be able to make the right decisions most of the time. From financial management to employee management, leadership failures will trickle down to every aspect of your business. The most successful entrepreneurs learn, study, and reach out to mentors to improve their leadership skills. I recommend that you read this book on leadership.
3 – No differentiation – It is not enough to have a great product. You also have to develop a unique value proposition, without you will get lost among the competition. What sets your business apart from the competition? What makes your business unique? It is important that you understand what your competitors do better than you. If fail to differentiate, you will fail to build a brand.
4 – Ignoring customer needs – Every business will tell you that the customer is #1, but only a small percentage acts that way. Businesses that fail lose touch with their customers. Keep an eye on the trending values of your customers. Find out if they still love your products. Do they want new features? What are they saying? Are you listening? I once talked to the CEO of a training company who told me that they don’t respond to negative reviews because they are unimportant. What? Are you kidding me?
5 – Inability to learn from failure – We all know that failure is usually bad, yet it is rare that businesses learn from failure. Realistically, businesses that fail, fail for multiple reasons. Often entrepreneurs are oblivious about their mistakes. Learning from failures is difficult.
6 – Poor management – Examples of poor management are an inability to listen, micro-managing – AKA lack of trust, working without standard or systems, poor communication, and lack of feedback.
7 – Lack of capital – It can lead to the inability to attract investors. Lack of capital is an alarming sign. It shows that a business might not be able to pay its bills, loan, and other financial commitments. Lack of capital makes it difficult to grow the business and it may jeopardize day-to-day operations.
8 – Premature scaling – Scaling is a good thing if it is done at the right time. To put it simply, if you scale your business prematurely, you will destroy it. For example, you could be hiring too many people too quickly, or spend too much on marketing. Don’t scale your business unless you are ready. Pets.com failed because it tried to grow too fast. They opened nationwide warehouses too soon, and it broke them. Even the great brand equity that they have built couldn’t save them. Within a few months, their stock went from $11 to $0.19.
According to a study of about 3200 high growth internet startups done by Startup Genome, about 70% of the startups in their dataset scaled prematurely.
9 – Poor location – Poor location is a disadvantage that might be too much to overcome. If your business relies on foot traffic, location is a strategic necessity. A poor location might make your customer acquisition costs too high.
10 – Lack of profit – Revenue is not the same as profit. As an entrepreneur, you must keep your eyes on profitability at all times. Profit allows for growth. According to Small Business Trends, only 40% of small businesses are profitable, 30% break even, and 30% are losing money.
11 – Inadequate inventory management – Too little inventory will hurt your sales. Too much inventory will hurt your profitability.
12 – Poor financial management – Use a professional accounting software like Freshbooks. Keep records of all financial records and always make decisions based on the information you get from real data. Know where you stand all the time. If numbers are not your thing, hire a financial professional to explain and train you to understand, at least the basics.
13 – Lack of focus – Without focus, your business will lose it the competitive edge. It is impossible to have a broad strategy on a startup budget. What makes startups succeed is their ability to quickly pivot, and the lack of focus leads to the inability to make the necessary adjustments.
14 – Personal use of business funds – Your business is not your personal bank account.
15 – Overexpansion – It is easy to make the mistake of expanding your business into too many verticals. Before you enter new markets make sure you maximize your existing market.
16 – Macroeconomic factors – Entrepreneurs can’t control macroeconomic factors. Common macroeconomic factors are business cycles, recessions, wars, natural disasters, government debt, inflation, and business cycles. Your business can still succeed in bad times. Hyatt, Burger King, FedEx, Microsoft, CNN, MTV, Trader Joe’s, GE, HP are only a few examples of wildly successful companies started during a tough economy.
17 – No succession plan – Future leaders should be identified in advance. Without an effective succession plan, your business is unprepared to fill openings in created by retirements, unexpected departures, or death.
18 – Wrong partner – It’s no secret that it is easier to succeed in business with the right partners. The wrong business partner will, at the very least hurt, or, at worst, destroy your company.
If you are serious about making it as entrepreneurs, focus on the following:
19 – Make a plan – It all begins with planning. The biggest mistake many entrepreneurs make as they start their ventures is that they don’t sit down and write a business plan. The goal is to keep it concise. Don’t treat it like a business school project. Leave writing a 50,000-word business plan to academics. Let them waste their time. You can do a great business plan in one or two pages. There are some great books on business plans such as “The Secrets to Writing a Successful Business Plan” and “Successful Business Plan“.
Your business plan should include the following:
20 – Core values – Your core values are the fundamental beliefs that drive your business. They are your guiding principles that should remain constant. Even as your company grows your core values should remain the same. Core values can also serve as a moral compass. Some of the more common core values are integrity, trust, excellence, respect, responsibility, and teamwork.
Don’t allow your core values to become empty words, make them part of your culture.
21 – Mission statement – A brief statement that defines why your company exists. Your corporate reason for being. It describes your target market and the services/products you offer. If you have done it right, your mission statement, in just a few sentences, will communicate the essence of your business to your business and to the world.
22 – Who are your customers – If you are going to succeed in business you will have a clear definition of your customer. It is not an abstract idea. It is something that can be expressed in numbers. For example, if your target customers are family law attorneys, you have to be able to put a number on it. For example, there are 175,000 (fictional number) family law attorneys in the USA and they are our customers.
23 – What is your product/service – It’s key to have a clear definition of the services you offer. Without a clear definition, you will be unable to effectively develop, market, and sell your services.
24 – Involve your customers in product development – Most businesses that fail create products/services without involving their customers. If you are serious about success, you will build your products with your customers. Businesses that fail build products based on assumptions.
Proper preparation doesn’t require a 100-page formal business plan. The keyword is “proper,” not “planning.” If you do everything in your power to properly plan your business, you increase your chances for success. Don’t confuse planning with avoiding action or paralysis analysis. No amount of planning is a substitute for action.
“No matter what one does, regardless of failure or success, the experience is a form of success in itself.” Jack Ma, billionaire founder of Alibaba
Your first action item is to write your business plan. Completing your business plan will give you an opportunity to process your idea in detail. One of the best things you can do is to collect your thoughts before you make a real commitment to starting your business. If you aren’t passionate about writing your business plan, it’s unlikely that you’ll get passionate about your business either.
One day you might think of a product that could revolutionize life on earth as we know it. You might dream up something so great that no one ever thought of before. The reality is that most successful businesses are without revolutionary ideas. Instead, they modify or improve well-established products or services.
If you don’t prepare a business plan, your initial enthusiasm will fade and you will fail.
26 – In the end, enthusiasm is not enough to succeed. It takes much more than that. You need to research your market, your competition, the financial feasibility of your concept, and more. As you fight through the battles of making your dream come true, you need to be able to go back to read and re-read your business plan. The concepts laid down in your business plan will help you to convince your bank to give you the loan you need, or to determine the best marketing strategy for your business. Don’t be emotional when you prepare your business plan. Treat it as a business process with goals and deliverables. Once you complete it, ask yourself, “Would I invest in this company?” Remember, you are going to have to convince others to support your idea. Bankers, corporate buyers, investors, partners, and the like will look at your business based on facts. Their decision is not going to be based on emotion. When creating a written business plan you give yourself a chance to think about your idea thoroughly. As you put your ideas in writing, you tend to give them more thought. You might think writing a business plan is boring, or a waste of time. Truly, it should be one of the most exciting projects you could ask for. You are writing your future.
27 – You are accountable – Many businesses fail because people treat them like hobbies. From day one treat your business as a business. Treat yourself as an employee. Set measurable goals and hold yourself accountable. If you only plan to work in your business a couple of hours a week, you can’t expect great results. Owning your own business requires focus and commitment. Educate yourself about the wide range of options and technologies. You can’t expect to get an ounce more out of your business than what you’ve 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. There are no shortcuts.
Entrepreneurs can stay accountable several ways:
28 – Write down your goals. Keep your goals in front of you and keep coming back to them, at least once a month.
29 – Build an advisory board.
30 – Join a peer advisory group. You will get feedback from fellow entrepreneurs. The best kind of peer advisory group is where your business is the smallest business. You definitely don’t want to be the largest or most successful business of your group. When you are the smallest you will be pushed harder to catch up to the others in your group.
31 – Find a coach. Try to work with a coach who has already built a successful business.
33 – Forget the idea, take action – You should never start a business based on a great idea. An idea is just that: an idea. It’s worthless. It is not going to help you succeed in business. Ideas won’t do; you need action to succeed. Wantrepreneurs are full of ideas that never result in action. Entrepreneurs are action takers.
Here are some effective ways to turn your idea into action:
34 – Believe that you can do it. I don’t mean fooling yourself into anything, but the only way can you make it happen if you believe that it will happen.
35 – Reach out to mentors. There are many successful people within your own existing network, and you can also make new connections. Connecting with mentors helps you hear what it takes to be an entrepreneur.
36 – Minimize risk, but understand that it is unavoidable.
37 – Give it due time. Ideas are fast, but making them happen will take time. Even if all goes well, almost everything you do in business will take longer than expected.
38 – Get others to believe in you. Successful entrepreneurs are great at selling their visions. You might have to convince vendors, partners, landlords, investors, employees, or a list of more people.
39 – Prepare to fail – Do not fear failure. There is one thing for sure, you will fail before you succeed. Expect failure but don’t fear it. Think of it as a normal part of your business. It is necessary. It is good for your business. It teaches you. It helps you make the right decision the next time. It is super important that you don’t associate failure with quitting. Only those that take action fail and only those that take action succeed.
40 – Pivot, rinse and repeat – Successful entrepreneurs are always adjusting. There are many reasons to adjust. Your customers might ask for a new software feature. Or, the recession might have put your best customers out of business. The price of raw materials might rise one day. Your business and its environment are dynamic. If you are good, you develop a keen eye for changes and make quick adjustments. Most businesses that fail do so because they ignore the world changing around them.
41 – Focus on your customer – You customer keeps you in business and puts you out of business too. If you listen to them, you can improve your products or services. If you ignore they fire you. Customers don’t disappear, they go to your competitors. Reach out to your customers. Ask them questions. Ask what they like or dislike. Welcome negative feedback. Don’t be defensive about it. Negative feedback gives you a chance to improve.
42 – Stay profitable – Staying profitable will solve many problems. The lack of profit could put you out of business even if you have record sales. Forget sales. Forget your revenue. Forget the total number of customers. Always be mindful of profitability.
43 – Manage cash – Entrepreneurs that fail often confuse cash flow with profit. The two are not synonymous. It is possible for you to go bankrupt with record cash flowing into your business. To succeed in business you don’t just need cash flow, you need positive cash flow. With positive cash flow happens when the cash funneling into your business is more than the amount of cash leaving your business. It is simple yet often ignored. The companies that ignore this end up with negative cash flow. This happens when the outflow of cash is more than your incoming cash. You should never allow negative cash flow.
Here are a few ways to improve your cash flow:
44 – Get paid in advance, ask for deposits or full payment in advance.
45 – Be very selective in offering credit to customers, avoid it if possible.
46 – Increase your sales.
47 – Offer incentives for early payment.
48 – Secure loans for emergencies.
49 – Disasters do happen – Even though Warren Buffet has a hands-off approach to managing his portfolio of companies. He does require the CEOs of each of his companies to have a one sheet in case of an emergency. The sheet of paper contains information on key aspects of the company. While the one sheet of paper might be overly simplified the point is that you have to be prepared for the worst.
50 – If you will succeed in business, you must figure out how to deal with the unexpected. It’s not that “what if it happens“, but “when it happens“. What if your best salesperson quits tomorrow? How long before you will replace her? Do you have a system in place, so when you hire a replacement she can sell?
Systems are crucial to recovering 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. For example, if your company relies on your e-commerce website, develop a system to recover your site even if your current site crashes and your hosting company goes out of business within the same day. You don’t have to be paranoid about it, but create systems of key parts of your company.
Few places are less forgiving than the business world. Eventually, everything adds up. If your customers prefer your competitors, your employees would rather work for someone else, your partners no longer believe in each other or the business, and the many mistakes you can make along the way. And that is why businesses fail.
Yes, it is true that most businesses fail. It is also true that many of them succeed. Those that succeed are not the result of miracles. Entrepreneurs who lead businesses to success understand that it takes a carefully planned and executed strategy. A little luck also helps.