What is business failure?
Business failure occurs if the firm fails to meet its responsibilities to the stakeholders of the organization, including employees, suppliers, customers and owners.
Every business has a life span that is depicted by its business life cycle. A business life cycle is normally defined by four stages;
Every business has a life span that is depicted by its business life cycle. A business life cycle is normally defined by four stages;
- Introduction
- Growth
- Maturity
- Decline.
Why do businesses fail?
1. Lack of Industry Experience
Every business has an environment in which it operates. The internal resources of a firm must match the needs of the environment to which the firm caters. Lack of experience in the industry will lead to poor organization of a firm and its resources.
2. Inadequate Financing
Financing is the lifeblood of growing a business whether in the startup phase or in a later stage. Many businesses fail due to lack of proper financing channels. It is not a matter of unavailability of funding, but the lack of planning for funding to support opportunities for growth. Planning in advance, rather than looking for financing just when needed, is a good practice.
3. Lack of Adequate Cash Flow
Cash flow is the measure of a firm’s ability to maintain sufficient funding to meet its expenses for the day-to-day activities of the business. Many small businesses fail because owners have a difficult time projecting what cash will come in every month, and thus, how much can go out. It is vitally important for an entrepreneur to learn some basic accounting disciplines and be able to make cash flow projections that will help them understand how much they can afford to spend every month.
4. Poor Business Planning
A good business plan helps identify the mission; cost structure; market; external influences; and strengths and weakness of a business.
5. Management Incompetence
Good management efficiently implements and monitors the strategic and operational plan of a business. A good strategic plan is only good as the management’s ability to implement changes in day to day operations
6. Ignoring the Competition
Customers are always looking for the best deal, or at least, a better deal. And if the competition offers better products, services, or prices, the customers will succeed at the expense of the business. Keeping an eye on competitors and positioning the products accordingly is vital to staying in business.
7. Unworkable Goals
It is one thing to set goals and another thing to set workable goals. Setting realistic goals, within the bounds of acceptable risk taking and optimism, is important.
8. Diminished Customer Base
Competition can cause the customer base to diminish. From a small business’s perspective, it is good to focus on a customer strategy that works well for their business.
At the same time it is also dangerous to focus only on one recipe for success. Diversifying the customer base is an important factor in building the business. Being flexible enough to adapt to new trends and ideas is important to staying in business.
9. Uncontrolled Growth
Uncontrolled growth of the business can also cause it to fail if not handled appropriately. Obesity is a problem in business as it is in an individual’s health. Proper planning must be in place even for business growth. Successful growth requires a professional management team, flexible organization, and proper systems and controls.
10. Inappropriate Location
The old real estate maxim — location, location, location — may be even truer in the small business world. Even the best-run retail establishment will have a difficult time succeeding if it is in a poor location. Location may not be applicable to all types of businesses, but when it is, it may be critically important.
11. Poor System of Control
While setting proper goals to manage the business, a system of controls is also needed to measure performance. Checks and metrics help owners manage organizational activities. A firm cannot control the external factors affecting its environment such as customers and competitors but it can adapt its internal organizational activities. Certain financial controls are needed to measure the overall financial performance of the business. A good control system will establish standards, measure performance, compare performance against standards and then provide for a way to correct procedures where needed.
12. Lack of Entrepreneurial Skills
Mostly during the startup phase of a new business, lack of entrepreneurial skills in an owner can cause a business to fail. This may not be true during the later growth and maturity periods of business where more administrative and management skills are required. Consequently, the personal and personality characteristics of an owner can be a cause of business failure.
Every business has an environment in which it operates. The internal resources of a firm must match the needs of the environment to which the firm caters. Lack of experience in the industry will lead to poor organization of a firm and its resources.
2. Inadequate Financing
Financing is the lifeblood of growing a business whether in the startup phase or in a later stage. Many businesses fail due to lack of proper financing channels. It is not a matter of unavailability of funding, but the lack of planning for funding to support opportunities for growth. Planning in advance, rather than looking for financing just when needed, is a good practice.
3. Lack of Adequate Cash Flow
Cash flow is the measure of a firm’s ability to maintain sufficient funding to meet its expenses for the day-to-day activities of the business. Many small businesses fail because owners have a difficult time projecting what cash will come in every month, and thus, how much can go out. It is vitally important for an entrepreneur to learn some basic accounting disciplines and be able to make cash flow projections that will help them understand how much they can afford to spend every month.
4. Poor Business Planning
A good business plan helps identify the mission; cost structure; market; external influences; and strengths and weakness of a business.
5. Management Incompetence
Good management efficiently implements and monitors the strategic and operational plan of a business. A good strategic plan is only good as the management’s ability to implement changes in day to day operations
6. Ignoring the Competition
Customers are always looking for the best deal, or at least, a better deal. And if the competition offers better products, services, or prices, the customers will succeed at the expense of the business. Keeping an eye on competitors and positioning the products accordingly is vital to staying in business.
7. Unworkable Goals
It is one thing to set goals and another thing to set workable goals. Setting realistic goals, within the bounds of acceptable risk taking and optimism, is important.
8. Diminished Customer Base
Competition can cause the customer base to diminish. From a small business’s perspective, it is good to focus on a customer strategy that works well for their business.
At the same time it is also dangerous to focus only on one recipe for success. Diversifying the customer base is an important factor in building the business. Being flexible enough to adapt to new trends and ideas is important to staying in business.
9. Uncontrolled Growth
Uncontrolled growth of the business can also cause it to fail if not handled appropriately. Obesity is a problem in business as it is in an individual’s health. Proper planning must be in place even for business growth. Successful growth requires a professional management team, flexible organization, and proper systems and controls.
10. Inappropriate Location
The old real estate maxim — location, location, location — may be even truer in the small business world. Even the best-run retail establishment will have a difficult time succeeding if it is in a poor location. Location may not be applicable to all types of businesses, but when it is, it may be critically important.
11. Poor System of Control
While setting proper goals to manage the business, a system of controls is also needed to measure performance. Checks and metrics help owners manage organizational activities. A firm cannot control the external factors affecting its environment such as customers and competitors but it can adapt its internal organizational activities. Certain financial controls are needed to measure the overall financial performance of the business. A good control system will establish standards, measure performance, compare performance against standards and then provide for a way to correct procedures where needed.
12. Lack of Entrepreneurial Skills
Mostly during the startup phase of a new business, lack of entrepreneurial skills in an owner can cause a business to fail. This may not be true during the later growth and maturity periods of business where more administrative and management skills are required. Consequently, the personal and personality characteristics of an owner can be a cause of business failure.
