Every entrepreneur knows that investing in any business has its risks. However, success lies in your choices as a small business owner. Therefore, before starting a new venture, it always pays to ask why businesses fail.
Whether you are a seasoned business owner or a new entrepreneur, these numbers are daunting. In addition, you may also have to deal with macroeconomic factors that are out of your control. For example, recessions, natural disasters, wars, and inflation hinder business success.
Aside from a tough economy, the reasons behind the failure of small businesses are often more straightforward than you may think. Moreover, you can control these factors once you understand how to navigate the business cycle.
This article dives into the most common reasons for business failure and offers business owners solutions to survive.
Bill Gates said, “It’s fine to celebrate success, but it is more important to heed the lessons of failure.”
When your business fails, it can result in losses that make it hard to recover. Therefore, before starting a new business, it is essential to anticipate and learn from the common mistakes that can cripple your growth in the long run. Taking preventative measures ensures business survival.
A business plan is the fundamental first step. Yet, it is surprising how many small business owners jump in with both feet without short-term and long-term planning. As a result, they often don’t know where they want their business to be in the next few months or years.
A mix of careful strategic planning, goals, a clear vision, and hard work are the ingredients for business success.
The components of an effective business plan should include the following:
“Failure isn’t fatal, but failure to change might be.” - John Wooden
In the business world, the only constant changes. As an entrepreneur, you may like the service or product you sell, but it’s equally important to understand market demands. Unfortunately, it is easy to fall victim to the most common reason for business failure - an unwillingness to stay agile and pivot when needed.
For example, if your walk-in traffic reduces, you could also set up an e-commerce platform, or change the merchandise to appeal more to your customers. On the other hand, if your business depends on tourists, find ways to use your resources for locals in the area during the off-season, or rent out your space to use as a wedding or meeting venue during the weekends.
A new and different product will always draw in crowds. However, even if your business has a lot of competition in the market, finding your unique selling point will help you stand out from the crowd. With the right value proposition, you can build a strong brand that differentiates you from your competitors.
For example, how will your bakery stand out in an area with many dessert shops? A combination of an active social media presence, a tie-up with a food delivery aggregator, a solid sales strategy, and a unique brand identity will help you succeed.
“The customer is always right.” Businesses that have stood by this philosophy for years know that a lack of customer service and a gap in understanding consumer behavior is one of the biggest reasons for business failure.
The fact is that while many businesses may say that the customer is essential, only some make an effort to prove it. Today’s marketplace is incredibly competitive, and customers have many options. As a result, gaining customer loyalty - and keeping it- has become notoriously difficult.
Entrepreneurship failure occurs when businesses do not conduct thorough consumer research, as they tend to lose touch with their customers.
For example, customers expect even small businesses to keep up with the times and allow digital payments like Apple Pay. Not all customers will give you feedback about a perceived service deficiency. Many will simply take their business elsewhere. Hence, you may have to take the initiative to elicit feedback from your customers regularly and keep an eye on their interests and trends in the marketplace.
“Leadership is solving problems. The day soldiers stop bringing you their problems is the day you have stopped leading them. They have either lost confidence that you can help or concluded you do not care. Either case is a failure of leadership.” Colin Powell
A business leader’s managerial skills can make or break a venture. Toxic traits like an inability to listen, a tendency to micro-manage, and vague or dismissive feedback breed a lack of trust in employees. This leadership failure highlights their inability to guide the business through inevitable hardships. On the other hand, a leader who excels in communication, problem-solving, empathy, and setting up standards and processes will usually help avoid business failure.
A business that keeps track of its inventory can make evidence-based decisions for buying and restocking that can save money in the long run. Investing in efficient people to keep an eye on raw materials and supplies or leveraging technology using inventory management software may seem daunting. However, its benefits outweigh the costs.
Every small business owner wants to scale their operations. However, timing is everything.
Hiring too many people or spending too much of the budget on marketing without evaluating if you have the capacity, the resources, or the expertise to keep up with the expansion is a crucial reason behind business failure.
Small business owners often cannot trust their employees to take over simple tasks. However, it is vital to analyze your strengths and weaknesses and determine which aspects of your business would thrive if they had an expert or skilled individual to head the initiative. In addition, delegating tasks to employees or team members gives you the time and energy to look into business growth and development opportunities.
A common mistake many businesses make is underestimating the amount of capital they need to start a new enterprise or having an unrealistic expectation of their revenues from sales during the first few years of business. It’s important to realize that companies take time to get off the ground, and one needs the right amount of capital to get them through the slow period. Otherwise, you may be forced to close before you get a chance at success.
A lack of capital inevitably repels news investors as it is an alarming sign that the business may not be able to cover its costs. Unfortunately, it also makes it challenging to grow the company as it cripples day-to-day operations.
When your business becomes profitable, you should also know how to manage finances in business to ensure long-term sustainability. This starts with a comprehensive balance sheet, cash reserves, income statements, sales and expense forecasts, and cash flow projections.
New business owners may need to budget their expenses properly, taking on too much debt without having enough reserves to help the business survive unexpected downturns.
Understanding the numbers and keeping track of your invoices and accounts receivables can go a long way in establishing financial security and avoiding business failure.
Financing a new business, funding an expansion, or keeping up with operational costs are challenging for startups and small business owners. As a result, they often turn to venture capitalists, traditional bank loans, and angel investors for funding. However, only some businesses can secure their finances this way.
Companies need to focus on maintaining a steady income flow or cash reserves. An often overlooked method of business financing is invoice factoring.
Invoice factoring allows business owners to prevent debt and interest payments arising from loans. It helps them overcome cash flow issues by ensuring they receive the money they have earned. A significant cause of a cash crunch in business is a backlog of outstanding invoices or accounts receivable, all your customers’ money owed to your business.
With invoice factoring, you can convert your outstanding invoices into instant cash, enabling you to keep up with operational costs and help your business grow. Since the invoices are directly exchanged for money with a third party, it immediately improves your business cashflow of the company, saving time and money.
When your enterprise sells its open invoices to a business factoring company, they have the right to collect the outstanding amounts from the original customers in exchange for an upfront amount that you can use as business capital. This amount is usually 60-80% of the invoice’s value. When the factoring company recovers the balance invoice, they will hand over the amount after cutting a fee for their services.
With invoice financing, a third party may provide your business with the funds it needs for daily operations and growth based on your accounts receivable. However, the responsibility of collecting the outstanding payments still lies with you as the business owner. In contrast, with invoice factoring, the factoring firm ensures the collection of outstanding funds.
There are many advantages to factoring that help small businesses avoid business failure.
As a business owner, you need to know the typical reasons why businesses fail. Don’t let these mistakes kill your entrepreneurial spirit. Take the opportunity to understand the reasons behind the business failure. By taking steps to address these common challenges, you can minimize the risk of failure. Invoice factoring is a valuable solution that can help businesses overcome several of these obstacles, including cash flow problems, slow-paying customers, and a lack of working capital. It can provide the stability needed to thrive in today's competitive marketplace.
Category: Small Business Finance