Business Management

How To Avoid the Top Ten Reasons for Business Failure


Only a small fraction of businesses reach their 10th anniversary!

In fact according to some sources (e.g. E-Myth, Michael E. Gerber) only 4% of businesses will make it.  Data from the UK Office of National Statistics puts that closer to 15%.  Best case scenario then: 85% of businesses won’t be around ten years from when they start.  I’m sure that’s not what most business startups expect from the outset.

So why is it that so many don’t make it?

According to a recent study, the top 10 reasons for business failure are:

  1. Lack of experience
  2. Insufficient capital
  3. Poor location
  4. Poor inventory management
  5. Over-investment in fixed assets
  6. Poor credit arrangements
  7. Personal use of business funds
  8. Unexpected growth
  9. Competition
  10. Low sales

As they say, if you know the cause of a problem you’re more than half way towards solving it.  So, as a business owner, what should you do about it?  Based on the list above, here’s a three step formula for business success…

Three Steps to Business Success not Failure

Success Not Failure. Image courtesy of FreeDigitalPhotos.net

Business Success Strategy #1: Ask for help

Based on inexperience being the number one cause of business failures, this is the best place to start.  In fact, inexperience can be highlighted as the root cause for many, if not all, of the “reasons” on this list.

Failing due to inexperience is how we learn and gain experience.  So it’s OK to fail.  However, the bigger the stakes the harder it is to accept out-and-out failure.  We need to be more willing to accept that we don’t know everything.

The problem is, we don’t know what we don’t know, so we all need to ask for help from time to time.  Sooner rather than later, before inexperience, lack of knowledge and mistakes turn into failure.

We need to find the right help.  We need to find enough of it.  We need to find it in the right areas: usually our areas of weakness.  And we need to find it as soon as possible.  Certainly no later than the moment we realise “I don’t know the answer to that”.

It’s clear from “The Breakthrough Company” by Keith R. McFarland, that all of the most successful small businesses that broke through to make it big sought out external help and advice.  They took advice wherever they could find it: from peers, investors, advisory boards, customers, suppliers and academics.

The solution then is: ask for help.  Lots of help.  Don’t be proud, get help wherever you can.  Take free help, buy help, invest in help.  Read books, watch videos, listen to experts, hire consultants, get a great mentor, teacher or coach.  Looking at the list above, the main areas to concentrate on are sales, marketing and financial management.

Business Success Strategy #2: Do thorough market research

Another area to get help in would be market research.  Adequate market research will help you avoid setting up with insufficient capital, setting up in the wrong place, being bettered by the competition and avoid lower than expected sales.  It may even allow you to plan for, if not anticipate, faster than expected sales growth.  Good market research is essential to succeeding in business, and inexperience may lead to poor or insufficient market research.  Starting with insufficient capital, starting in the wrong place, having the wrong levels of types of inventory, not anticipating the effects of competition, and likely sales levels can all be estimated better with good market research.

If you don’t know what research to do then it is imperative that you ask for help in this area too.

Business Success Strategy #3. Plan for both failure and success

When creating your business plan from your market research (in whatever form that takes) make sure that your projections cover all of the most likely scenarios.  This doesn’t mean plan for every possible outcome, but plan for the worst case and best case scenarios out of all of the most likely outcomes.  What if you are incredibly successful?  What is the impact on cash-flow?  What capitalisation do you need to cover the resulting cash gap?  What are your competition likely to do?  What will your response be?  If sales are lower than expected, how will you cover the lower than expected revenues?

While this advice is aimed at business start-ups, an established business wanting to expand, diversify or otherwise “take it to the next level” can also apply the same thinking to avoid their new venture from failing.


 

First published at www.garethshackleton.co.uk

 

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