Establishing a business is a nightmare for many people, as many new businesses fail. That is why many people are afraid to invest their time and resources into starting one.
Either way, these are staggering figures when one takes into account that most new businesses fail for more or less the same reasons. Most of these reasons are presented below, ranked in the order of the threat they pose according to the entrepreneurs surveyed for this book. Note, however, that those placed at the end of the list are not necessarily the least dangerous.
These are the main reasons why many new businesses fail:
Inadequate Planning
As simple as it sounds, lack of forethought and planning is the main culprit behind virtually every business failure. Thankfully, 75% of most business ideas fail on paper (i.e., during the planning stage), which is exactly where a business idea should fail. The only other option is for it to collapse in the marketplace, perhaps under a pile of debt.
Inadequate planning includes, but is not limited to, not fully understanding a product or service before selling it, not conducting detailed market or labor research, not compiling a realistic customer profile, not researching the competition, not selecting a proper business model, not determining all costs beforehand, or, in general, not doing enough preliminary work to determine whether all the numbers add up.
In short, running a business without a well-researched plan is like hacking through a jungle without a map. Put another way, if you do not have the time or inclination to plan, write down, investigate, and analyze what you want to do regarding starting a business, then you probably do not have what it takes to succeed.
Underestimating the Commitment It Takes to Succeed
In a world where almost everything is expected instantly, it is easy to forget that quality and strength take time to develop. For example, it can take up to six months or longer to put together a business plan and as much as five to seven years (or longer) to establish a solid customer base. I will use the story of the photocopier to illustrate this point.
Cash Flow Problems
If passion, commitment, and planning are more important than money, then why do cash flow problems appear at the top of the list of reasons why businesses fail? Think of it this way: money is not needed to conceive a baby, but once a baby is born, it needs to be fed — and the bigger the baby gets, the more food it needs. So it is with a business.
Too many entrepreneurs confuse the word cash with the word profit, thinking they are one and the same. “Profit” is a word for accountants. “Cash” is what a business feeds on in order to survive.
Poor Management
Entrepreneurship is sometimes described as the death of management. Paradoxically, it has also been said that management is the death of entrepreneurship. These comments refer to the belief that after setting up a business, too many entrepreneurs stiffen into rigid managers guided only by routines — a problem that probably arises because most people do not fully understand what good management is about.
In short, management is not about being a boss. Good management is about serving others: providing for others, motivating people, getting work done through others, and streamlining a business toward making sales — and that is just the beginning. Indeed, some practitioners believe that managers who are in denial about what is happening in their business are the real number one reason why most businesses fail. Additional managerial problems include an inability to delegate, inflexibility, micromanaging the work of others, or abdicating important responsibilities.
Not Understanding the Importance of Customers
Setting up a new business involves so much work that it is easy to forget about paying customers. Interior design, bookkeeping, product displays, and other non-revenue-generating activities — although important — should not be the main priority of a business. Successful business operations rely on receiving money from satisfied customers on a regular basis.
Yet, no matter how simple this concept sounds, it is surprising how many businesses lose sight of it. For example, years ago a wealthy doctor wanted to purchase industrial-size washing machines and dryers for the hospitals he owned. He approached me for help, but I did not have any free time, so I referred him to my father, a retired executive who is always looking for something to do.
“Over the past month, I have contacted every washing machine manufacturer in the country,” he told me later, “but no one seems able to answer even my most basic questions, my messages are not being returned, and I am tired of begging.”
Staffing Problems
People problems usually begin by:
- Not fully investigating the background of job applicants.
- Failing to properly train employees.
- Hiring friends and relatives for long-term positions.
- Employing people who are clones of the entrepreneur rather than those whose skills can balance the entrepreneur’s weaknesses.
No matter what the business is, finding honest workers who share the owner’s passion and commitment can be an arduous and time-consuming process. To be sure, almost every small business has, at one time or another, been forced to hire the first breathing job applicant who appeared in the doorway. That being said, it is possible to attract capable people into joining an organization because it — or the person behind it — impresses them.
Inflexibility
Small businesses should not act like rigid, inflexible corporations. From the business plan to the marketing campaign to the importance of finalizing a sale, if something is not working properly, it should be changed quickly. Change can happen in one of two ways: it can either be directed by you or it can run over you.
Keep in mind the definition of insanity — constantly repeating the same behavior while expecting different results — and the dangers of inflexibility become more obvious. Persistence is an admirable trait, but when it turns into stubbornness, it can lead to trouble.
Poor Marketing and/or an Inability to Sell
Contrary to popular belief, if you build a better mousetrap, the world will not automatically beat a path to your door. Equally true is the fact that good products and services do not sell themselves. Simply put, the success of every enterprise hinges on its ability to sell — and the ability to sell begins with understanding the basics of marketing, promotion, and human psychology.
Not Enough Capital
Too many new business owners underestimate how much money they need — not only to get their business off the ground, but also to keep it running through the first year or so of operations when money is tight.
That is not to say that huge amounts of money are always needed to succeed as an entrepreneur. For example, one entrepreneur in the USA made a tidy profit writing and selling a small booklet that contained recipes for 100 different meals made with ground beef. Another American entrepreneur sold fishing lures by doing little more than advertising in a sports journal. For one dollar and the cost of postage, readers were asked to send in an unlucky lure, for which they would receive a different lure in return.
Pricing Problems
The price of a product is usually the most significant factor affecting a customer’s decision about whether or not to buy it. Equally true is the fact that the price contains the profit a business hopes to make. Entrepreneurs want to make as much money as possible, while customers want to save as much money as they can. Unfortunately, it is usually the entrepreneur who loses this struggle.
In an effort to attract customers, the most common pricing mistake made by new businesses — especially service providers — is to undercharge or give away labor or materials for free. Yet once a product or service has been provided for free, the business no longer has any leverage to collect payment.
Another factor that must be considered when establishing a good price is the amount of time, work, and effort invested in the product or service. Setting a price involves much more than simply covering expenses or charging what everyone else is charging.
Final Thoughts
As an entrepreneur, you must make sure that you develop the right attitude toward managing your new business venture. You should maintain discipline in business and avoid mixing business with family or friendship matters. A business is like a newborn child — it needs care, patience, and time to grow properly.