According to research conducted by Small Business Administration, only 50% of new businesses survive at the start of the first five years and the other 50% fail. Forbes reports, that of every 10 startups, 8 fail within the first eighteen months––breaks our heart.
What Are The Reasons Behind A Business Failure?
Well, given a 50/50 chance of both survival and failure, let’s discuss 6 top reasons why businesses fail.
1. Leadership Failure
No one could succeed with poor management skills. If a person doesn’t have enough experience in supervising staff, making management decisions or the power to achieve small targets on time then its bad news. Because day to day running of a business requires strong leadership skills, and if an entrepreneur is reluctant to resolve the issues, the business continues to fall toward failure.
Learn ‘how to overcome leadership failure’.
2. Lacking a Strong Value Proposition
Even if someone has a great demanding product or service, but his business is still failing it may be because of that mediocre approach or due to lack of uniqueness and value. Strong demand means that a business owner probably has a lot of competitors and is not able to stand out in the crowd.
To combat value proposition failure, one needs to think about the following questions.
- What sets your product or service apart from competitors? And
- How your competitors are doing better?
To answer these questions, it is advisable to develop a customized approach that no one else in the industry is using. This way a business owner can attract customer’s attention and interest.
Furthermore, it is advisable to use social media, cold calling, word of mouth, direct mail, and other digital marketing techniques. An entrepreneur needs to ensure that his brand has well-optimized online presence and lead generation techniques by offering a subscriber newsletter, high-quality content on the site, and information giveaways.
3. Neglecting Customer Needs
Most startups fail due to their negligence of staying in touch with their customers like what they need, complaints, and the feedback they offer. It happens that customers like any product but, perhaps they need a little change in its feature. Being an entrepreneur one must remain alert of customer’s feedback; otherwise, the demand for the product will start declining and would become the reason for business failure.
How to Avoid Losing Customers?
To become a successful businessman, one must keep an eye on the interests and trending values of its existing and new customers. For this, it is essential to do market research to find out about their interests and to keep abreast of latest changes using CRM tools. Effective use of a customer relationship management tools can help keep a small business from failing.
4. Unprofitable Business Model
One of the most common reasons why businesses fail is the preparation of an unsound business model. Likewise, operating a business without a good business plan does the same damage. No matter how good the business idea is but one could fail to implement the idea if there is no strategic framework in place.
Tips to Build a Good Business Model:
- First, research how other businesses in the industry operate.
- Prepare a sound business plan that includes at least 3 to 5 years of financial forecasting, strategic marketing, and possible solutions to overcome potential management obstacles and competitor activities. A sound business plan can help businesses avoid failure.
- Create a milestone chart highlighting individual tasks and objectives so you can measure success, solve issues soon as they occur, and stay focused.
5. Poor Financial Management
A businessman must know where the money is coming from and where it’s going. This could be tracked with the help of cash flow statements which is a major component of financial statements. Likewise, any business can fail if there is no reserve of money or a proper contingency funding plan that an entrepreneur can utilize in the event of a financial crisis.
Most of the times people start businesses just by investing a huge amount of money but don’t have the leadership skill to keep track of taxes, expenses, cash flow, and other financial issues.
How to Avoid Financial Mismanagement?
It is advisable to use professional business accounting software such as Xero or QuickBooks (mostly used by small businesses) to keep records of all day to day financial transactions and expenditures and revenues received. All the information generated by the software is then used to generate annual profit and loss statements.
6. Over-expansion and Rapid Growth
In the past, we have seen that many startups grow much faster than expected. For example, a person opens an e-commerce website loaded with trending products and suddenly starts receiving the bulk of orders which he is not able to fill on time that later leads towards business failure.
How to Avoid Over Growth Problems?
Business growth is what every entrepreneur wants. However, it takes as much strategic planning as managing daily operations. Even successful and well-established commercial franchises conduct careful research and planning before going forward. They spend time planning about future development and handling other pertinent issues before they go worse. Therefore, all new business owners must do the same to get success.
Furthermore, it is advisable to conduct thorough research to ensure that enough funding is available for expansion. Don’t accept orders you’re not sure you can sell on time but do prepare a plan in advance to fill orders quickly should the demand is given. In short the key to successful business growth—and avoiding business failure—is long-term strategic planning.
If 50% of new startups fail, then the other 50% get success also. Whether you’re already running a business or desire to start a new business, you must understand that success is directly related to careful strategic planning and fiscal management that begins initially and continue throughout the life of a company.
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