Why is it that so many businesses fail while so few
succeed?
One of the great
mysteries of entrepreneurship is why businesses fail. Some people start one
successful business after another while others fail to succeed.
Why some businesses fail while others succeed?
The worst part
about a failing business is that the entrepreneur is unaware of it happening
until it is often too late. It makes sense because if the entrepreneur really
knew what he was doing wrong, he might have been able to save the business.
Some entrepreneurs live in a land of denial while others are unaware of their
mistakes. I recommend you read Failing Forward: Turning Mistakes into Stepping Stones for
Success, a great book about going from mistakes to success.
One thing for sure, a business almost always fails because of
the entrepreneur.
“It’s not the
plan that is important, it’s the planning.” Dr. Graeme Edwards
There are over 28
million small businesses in the United States, according to the SBA.
It’s an impressive
number. The sad reality is that only about 50% of them survive. What’s worse is
that only about one-third survive 10 years or more. The life of an entrepreneur is
unforgiving. It is a constant challenge. There are many moving parts. Any one
of them could put you out of business.
Businesses fail for many reasons. The following list includes
some of the most common reasons:
1 – Lack of
planning – Businesses
fail because of the lack of short-term and long-term planning. Your plan should
include where your business will be in the next few months to the next few
years. Include measurable goals and results. The right plan will include specific to-do
lists with dates and deadlines. Failure to plan will damage
your business.
2 – Leadership
failure – Businesses
fail because of poor leadership. The leadership must be able to make the right
decisions most of the time. From financial management to employee management,
leadership failures will trickle down to every aspect of your business. The
most successful entrepreneurs learn, study, and reach out to mentors to improve
their leadership skills. I recommend that you read this book on leadership
.
.
3 – No
differentiation – It is not enough to have a great product. You also have to
develop a unique value proposition, without you will get lost among the
competition. What sets your business apart from the competition? What makes
your business unique? It is important that you understand what your competitors
do better than you. If fail to differentiate, you will fail to build a brand.
4 – Ignoring
customer needs – Every business will tell you that the customer is #1, but
only a small percentage acts that way. Businesses that fail lose touch with
their customers. Keep an eye on the trending values of your customers. Find out
if they still love your products. Do they want new features? What are they
saying? Are you listening? I once talked to the CEO of a training company who
told me that they don’t respond to negative reviews because they are
unimportant. What? Are you kidding me?
5 – Inability
to learn from failure – We all know that
failure is usually bad, yet it is rare that businesses learn from failure.
Realistically, businesses that fail, fail for multiple reasons. Often
entrepreneurs are oblivious about their mistakes. Learning from failures is
difficult.
6 – Poor
management – Examples
of poor management are an inability to listen, micro-managing – AKA lack of
trust, working without standard or systems, poor communication, and lack of
feedback.
7 – Lack of
capital – It
can lead to the inability to attract investors. Lack of capital is an alarming
sign. It shows that a business might not be able to pay its bills, loan, and
other financial commitments. Lack of capital makes it difficult to grow the
business and it may jeopardize day-to-day operations.
8 – Premature
scaling – Scaling
is a good thing if it is done at the right time. To put it simply, if you
scale your business prematurely, you will destroy it. For example, you could be
hiring too many people too quickly, or spend too much on marketing. Don’t scale
your business unless you are ready. Pets.com failed
because it tried to grow too fast. They opened nationwide warehouses too soon,
and it broke them. Even the great brand equity that they have built couldn’t
save them. Within a few months, their stock went from $11 to $0.19.
According to a study of about
3200 high growth internet startups done by Startup Genome, about 70% of the startups in
their dataset scaled prematurely.
9 – Poor
location – Poor
location is a disadvantage that might be too much to overcome. If your business
relies on foot traffic, location is a strategic necessity. A poor location might
make your customer acquisition costs too high.
10 – Lack of
profit – Revenue
is not the same as profit. As an entrepreneur, you must keep your eyes on
profitability at all times. Profit allows for growth. According to Small
Business Trends, only 40% of small businesses are profitable, 30% break even,
and 30% are losing money.
11 – Inadequate
inventory management – Too little inventory will hurt your sales. Too much inventory
will hurt your profitability.
12 – Poor financial
management – Use
a professional accounting software like
Freshbooks. Keep records of all financial records and always make
decisions based on the information you get from real data. Know where you stand
all the time. If numbers are not your thing, hire a financial professional to
explain and train you to understand, at least the basics.
13 – Lack of
focus – Without focus, your business will
lose it the competitive edge. It is impossible to have a broad strategy on a
startup budget. What makes startups succeed is their ability to quickly pivot,
and the lack of focus leads to the inability to make the necessary adjustments.
14 – Personal use
of business funds – Your business is not your personal bank account.
15 –
Overexpansion – It is easy to make the mistake of expanding your business
into too many verticals. Before you enter new markets make sure you
maximize your existing market.
16 – Macroeconomic
factors – Entrepreneurs
can’t control macroeconomic factors. Common macroeconomic factors are business
cycles, recessions, wars, natural disasters, government debt, inflation, and
business cycles. Your business can still succeed in bad times. Hyatt, Burger
King, FedEx, Microsoft, CNN, MTV, Trader Joe’s, GE, HP are only a few examples
of wildly successful companies started during a tough economy.
17 – No succession
plan – Future leaders
should be identified in advance. Without an effective succession plan, your
business is unprepared to fill openings in created by retirements, unexpected
departures, or death.
18 – Wrong
partner – It’s
no secret that it is easier to succeed in business with the right partners. The
wrong business partner will, at the very least hurt, or, at worst, destroy your
company.
If you are serious
about making it as entrepreneurs, focus on the following:
19 – Make a plan – It all
begins with planning. The biggest mistake many entrepreneurs make as they start
their ventures is that they don’t sit down and write a business plan. The goal
is to keep it concise. Don’t treat it like a business school project. Leave
writing a 50,000-word business plan to academics. Let them waste their time.
You can do a great business plan in one or two pages. There are some great
books on business plans such as “The Secrets to Writing a Successful Business Plan”
and “Successful Business Plan“.
Your business plan should include the following:
20 – Core
values – Your
core values are the fundamental beliefs that drive your
business. They are your guiding principles that should remain
constant. Even as your company grows your core values should remain the same.
Core values can also serve as a moral compass. Some of the more common core
values are integrity, trust, excellence, respect, responsibility, and teamwork.
Don’t allow your
core values to become empty words, make them part of your culture.
21 – Mission
statement – A
brief statement that defines why your company exists. Your corporate reason
for being. It describes your target market and the services/products you offer.
If you have done it right, your mission statement, in just a few sentences,
will communicate the essence of your business to your business and to the
world.
22 – Who are your
customers – If
you are going to succeed in business you
will have a clear definition of your customer. It is not an abstract idea. It
is something that can be expressed in numbers. For example, if your target
customers are family law attorneys, you have to be able to put a number on it.
For example, there are 175,000 (fictional number) family law attorneys in the
USA and they are our customers.
23 – What is your
product/service – It’s key to have a clear definition of the services you
offer. Without a clear definition, you will be unable to effectively develop,
market, and sell your services.
24 – Involve your
customers in product development – Most businesses that fail create products/services without
involving their customers. If you are serious about success, you
will build your products with your customers. Businesses that fail build
products based on assumptions.
25 – How will you
sell and market your product/service – Marketing and selling your service could be one of your biggest business challenges. A sales and
marketing plan is a must. Set measurable goals.
Create systems to manage the process.
Proper preparation
doesn’t require a 100-page formal business plan. The keyword is “proper,” not
“planning.” If you do everything in your power to properly plan your business,
you increase your chances for success. Don’t confuse planning with avoiding
action or paralysis analysis. No amount of planning is a substitute for action.
“No
matter what one does, regardless of failure or success, the experience is a
form of success in itself.” Jack Ma, billionaire founder of Alibaba
Your first action
item is to write your business plan. Completing your business plan will give
you an opportunity to process your idea in detail. One of the best things you
can do is to collect your thoughts before you make a real commitment to
starting your business. If you aren’t passionate about writing your business
plan, it’s unlikely that you’ll get passionate about your business either.
One day you might
think of a product that could revolutionize life on earth as we know it. You
might dream up something so great that no one ever thought of before. The
reality is that most successful businesses are
without revolutionary ideas. Instead, they modify or improve well-established
products or services.
If you don’t prepare a business plan,
your initial enthusiasm will fade and you will fail.
26 – In the end,
enthusiasm is not enough to succeed. It takes much more than that. You need to research your
market, your competition, the financial feasibility of your concept, and more.
As you fight through the battles of making your dream come true, you need to be
able to go back to read and re-read your business plan. The concepts laid down
in your business plan will help you to convince your bank to give you the loan
you need, or to determine the best marketing strategy for your business. Don’t
be emotional when you prepare your business plan. Treat it as a business
process with goals and deliverables. Once you complete it, ask yourself, “Would
I invest in this company?” Remember, you are going to have to convince others
to support your idea. Bankers, corporate buyers, investors, partners, and the
like will look at your business based on facts. Their decision is not going to
be based on emotion. When creating a written business plan you give yourself a
chance to think about your idea thoroughly. As you put your ideas in writing,
you tend to give them more thought. You might think writing a business plan is
boring, or a waste of time. Truly, it should be one of the most exciting
projects you could ask for. You are writing your future.
27 – You are
accountable – Many businesses fail because people treat them like hobbies.
From day one treat your business as a business. Treat yourself as an
employee. Set measurable goals and hold yourself accountable. If you only plan
to work in your business a couple of hours a week, you can’t expect great
results. Owning your own business requires focus and commitment. Educate
yourself about the wide range of options and technologies. You can’t expect to
get an ounce more out of your business than what you’ve put into it. If you are
only willing to put in a few hours a week, expect to get a few hours a week of
income. There are no shortcuts.
Entrepreneurs can stay accountable several ways:
28 – Write down
your goals. Keep your goals in
front of you and keep coming back to them, at least once a month.
29 – Build an
advisory board.
30 – Join a peer
advisory group. You
will get feedback from fellow entrepreneurs. The best kind of peer advisory
group is where your business is the smallest business. You definitely don’t
want to be the largest or most successful business of your group. When you are
the smallest you will be pushed harder to catch up to the others in your group.
31 – Find a coach. Try to work with a
coach who has already built a successful business.
33 – Forget the
idea, take action – You should never start a business based on a great idea. An
idea is just that: an idea. It’s worthless. It is not going to help you succeed
in business. Ideas won’t do; you need action to succeed. Wantrepreneurs are
full of ideas that never result in action. Entrepreneurs are action takers.
Here are some effective ways to turn your idea into action:
34 – Believe that
you can do it. I
don’t mean fooling yourself into anything, but the only way can you make it
happen if you believe that it will happen.
35 – Reach out to
mentors. There are many
successful people within your own existing network, and you can also make new
connections. Connecting with mentors helps you hear what it takes to be an
entrepreneur.
36 – Minimize
risk, but understand that it is unavoidable.
37 – Give it due
time. Ideas are fast, but
making them happen will take time. Even if all goes well, almost everything you
do in business will take longer than expected.
38 – Get others to
believe in you. Successful
entrepreneurs are great at selling their visions. You might have to convince
vendors, partners, landlords, investors, employees, or a list of more people.
39 – Prepare to
fail – Do not fear
failure. There is one thing for sure, you will fail before you succeed. Expect
failure but don’t fear it. Think of it as a normal part of your business. It is
necessary. It is good for your business. It teaches you. It helps you make the
right decision the next time. It is super important that you don’t associate
failure with quitting. Only those that take action fail and only those that
take action succeed.
40 – Pivot, rinse
and repeat – Successful
entrepreneurs are always adjusting. There are many reasons to adjust. Your
customers might ask for a new software feature. Or, the recession might have
put your best customers out of business. The price of raw materials might rise
one day. Your business and its environment are dynamic. If you are good, you
develop a keen eye for changes and make quick adjustments. Most businesses that
fail do so because they ignore the world changing around them.
41 – Focus on your
customer – You
customer keeps you in business and puts you out of business too. If you listen
to them, you can improve your products or services. If you ignore they fire
you. Customers don’t disappear, they go to your competitors. Reach out to your
customers. Ask them questions. Ask what they like or dislike. Welcome negative
feedback. Don’t be defensive about it. Negative feedback gives you a chance to
improve.
42 – Stay
profitable – Staying
profitable will solve many problems. The lack of profit could put you out of
business even if you have record sales. Forget sales. Forget your revenue.
Forget the total number of customers. Always be mindful of profitability.
43 – Manage
cash – Entrepreneurs that
fail often confuse cash flow with profit. The two are not synonymous. It is
possible for you to go bankrupt with record cash flowing into your business. To
succeed in business you don’t just need cash flow, you need positive cash flow.
With positive cash flow happens when the cash funneling into your business is
more than the amount of cash leaving your business. It is simple yet often
ignored. The companies that ignore this end up with negative cash flow. This
happens when the outflow of cash is more than your incoming cash. You should
never allow negative cash flow.
Here are a few ways to improve your cash flow:
44 – Get paid in
advance, ask for deposits or full payment in advance.
45 – Be very
selective in offering credit to customers, avoid it if possible.
46 – Increase your
sales.
47 – Offer
incentives for early payment.
48 – Secure loans
for emergencies.
49 – Disasters do
happen – Even
though Warren Buffet has a hands-off approach to managing his portfolio of
companies. He does require the CEOs of each of his companies to have a one
sheet in case of an emergency. The sheet of paper contains information on key
aspects of the company. While the one sheet of paper might be overly simplified
the point is that you have to be prepared for the worst.
50 – If you will
succeed in business, you must figure out how to deal with the unexpected. It’s not that “what
if it happens“, but “when it happens“. What if your best salesperson quits
tomorrow? How long before you will replace her? Do you have a system in place,
so when you hire a replacement she can sell?
Systems are crucial
to recovering from a disaster. Formal procedures are key. Identify the key
parts of your business and think about what it would take to recover losing any
of them. For example, if your company relies on your e-commerce website,
develop a system to recover your site even if your current site crashes
and your hosting company goes out of business
within the same day. You don’t have to be paranoid about it, but create systems
of key parts of your company.
In Conclusion
Few places are less
forgiving than the business world. Eventually, everything adds up. If your
customers prefer your competitors, your employees would rather work for someone
else, your partners no longer believe in each other or the business, and the
many mistakes you can make along the way. And that is why businesses fail.
Yes, it is true
that most businesses fail. It is also true that many of them succeed. Those
that succeed are not the result of miracles. Entrepreneurs who lead businesses
to success understand that it takes a carefully planned and executed strategy.
A little luck also helps.
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