Understanding Common Reasons Why Businesses Fail and How to Avoid them

Running a business is no small feat, and understanding why businesses fail is crucial to building a successful and sustainable enterprise. In this month’s edition, we delve into some foundational reasons businesses often stumble and provide insights on how to steer clear of these pitfalls.

Reason Number 1:

Lack of Financial Knowledge

Financial knowledge is the backbone of any successful business. Understanding business finance is not something learned overnight and can take years of practice to master. The complexity of your finances is relative to the size of your business. For example, if you are just starting out and are your only employee, the financial workings of your business will likely be fairly simple. However, for a million-dollar-plus business with many employees, the financial aspects can be quite complex.

Here are some key aspects of financial knowledge for your business:

• Tracking finances: It’s essential to keep a close eye on the money collected, money spent, and money borrowed.
• Cost and pricing: Understand the cost of providing your product/service versus what to charge for it to ensure profitability.
• Borrowing money: Learn about different financing options such as working capital loans, vehicle financing, and other types of financing.
• Negotiating costs: Lower your expenses by negotiating better prices for the products or services you need.
• Reading financial statements: Being able to read and understand your profit and loss statements, balance sheets, and other financial documents is crucial.
• Tax strategy: Know how taxes impact your business and develop a strategy to manage them effectively.
• Separating personal and business spending: This is crucial for understanding the true financial health of your business.

When you start to understand these aspects, you become empowered to make strategic decisions for your business. You will be able to identify trends and decide whether it’s time to hire another employee, purchase a truck, raise (or decrease) your pricing, negotiate costs, and much more. The bottom line is that to build a truly successful business, you need to get comfortable with knowing your numbers.

Reason Number 2:

Ineffective Business Planning

Many entrepreneurs start their businesses without a clear and defined plan. While this is a common initial approach, it’s critical to develop a business plan as you go along. Without a plan, you lack a roadmap for making business decisions, spending money, marketing, and all the other activities involved in growing your business.

Think of it as flying a plane without instruments. How do you know where you are going or if you are headed in the right direction? Here are some elements to consider when creating your business plan:

• Ultimate goal: Why are you doing this?
• Revenue target: What kind of revenue do you want to make, and how many customers do you need to achieve this?
• Employee needs: Do you want or need employees to achieve your revenue goals?
• Services/products: What do you want to offer, and is there a return on investment for delivering these?
• Brand building: Are you targeting a budget friendly market or aiming for a premium, exclusive brand?
• Exit plan: Are you planning to pass the business down, sell it, or retire?
• Personal goals: Factor these into your overall business plan.

A well-defined plan can change and evolve over time. The key is to consistently monitor your plan and make improvements as needed. Having a plan gives you the confidence to say “yes” to the right opportunities and “no” to the wrong ones, helping you build a successful business.

Reason Number 3

Inadequate Management

In the early stages of a business, entrepreneurs often wear all the hats—owner, manager, technician, accountant, and problem solver. This is often necessary to get the business going, but it doesn’t always have to be this way. As your business grows, more elements will need focused management, including:

• Customer service and support
• Finances
• Advertising
• Employee recruiting, training, and management
• Building culture

Each of these areas will require more focus and management as your business expands. While learning as much as you can is beneficial, you will eventually need to delegate different roles and tasks to people who can successfully manage them. Building your financial knowledge and your plan will help you put these pieces in place and afford them.

Reason Number 4:

Marketing Mishaps

Business owners are often bombarded with offers for various advertising services, which can be overwhelming. Some of these services may be effective, but many are not, and falling prey to ineffective marketing can be costly. Before spending money on marketing, refer to your business plan to identify where you can best allocate your marketing budget.

Consider:

• Service type: What kind of service are you
  trying to sell (good, better, or best)?
• Brand image: What brand image are you trying
  to portray?
• Target customers: Where are your target
  customers, and what platforms are they on?
  What do they like?

Different age groups and income levels may require different marketing approaches. Don’t just throw money at various marketing tactics to see what sticks. Instead, develop a strategic marketing plan to attract the right customers and avoid costly mistakes. Seeking professional help can be beneficial, but always do your due diligence.

Reason Number 5:

Lack of Working “ON” Your Business

There’s a saying: “Work ON your business, not IN it.” As a business owner, it’s critical to spend dedicated time working on all the aspects discussed. Building time to focus on these elements will help you avoid getting stuck and stressed out, ultimately preventing you from simply creating a job for yourself instead of building a company

Many business owners often say they’re too busy or don’t have enough time. However, the success of your business requires that you put in the time to focus on it. By addressing these common reasons for business failure, you can set your business on a path to success and profitability