Why do Businesses Fail?
And what you can do to prevent it
Businesses fail for all kinds of reasons from being in the wrong location for the business type, to not having a unique selling point (USP).
In this post we will look into some of the reasons the businesses fail and we will also look at what you can do to try and prevent it happening to your business.
1. Starting a business for the wrong reason
Most advice starts along the lines of "start a business doing something you love", but this can go badly. What if your business idea isn't profitable and you end up doing something that you don't like just to make enough money to keep going? Or what if you end up not liking your hobby once you realise that you have to be able to make money off it? What you have to consider when you are starting a business is that you have to like what you're doing but you also have to be able to make money off it.
In order to know whether or not you can make money off it you can conduct market research in the area that you're thinking of starting up. You can also try and get advice from other businesses in the area on the things that they wished they had known at the time of starting. Things such as networking events could be useful for this.
2. Poor Management
Why would poor management mean the failure for a business? This could be due to the fact that new business owners may lack experience. They have experience in their field of expertise but they can be lacking in finance experience, purchasing, selling and production. All of this can then lead on to the failure of the business due to the lack of managerial support.
To counteract this business owners can go on courses in order to better understand their full workload and responsibilities. Also they should consider taking on additional staff or even setting up the business as a partnership where each partner brings a different level of experience into the business. There are also many different software packages which could help you manage these areas better too.
3. Insufficient Capital
Many business owners don't realise how much money is required to not only open a business but then to also keep it going month after month. Also many business owners are guilty of having an unrealistic expectation of how much money they will be able to make through their sales.
To help overcome this you should look at how much money your new business will require, not just to start up and get going but to then also stay going and even gain ground. You need to look at things such as production costs, advertising costs, premises rent, business rates, wages, as well as things like the cost of living. Owners may find that they're taking money from the business in order to fund their personal life, such as mortgage and bills, when the business cannot afford to do so.
4. Starting in the wrong location
When businesses are set up sometimes not much thought is given to the location of the business. This can be a reason for the business to fail. Most business owners want to start somewhere close to home in order to help the local economy, or just because they know the area and the customers that they are likely to have. But the business may not be suited to the area which could cause problems down the line. For example, what the purpose of a computer shop be in the middle of an area known for farming? It may seem like a good idea at the time and the business may start out with the intention of helping farmers to access computer equipment that could help to save them money. But what would happen when all the farmers in the area have used the services? Would you have enough of a reputation to attract business from other areas or would the business start to fail? The point here is a business should be set up in an area that suits its needs.
5. Over Expansion
Some business owners confuse success with how quickly they are able to expand. When this happens businesses can quickly fail. What should be done is businesses should look at how large their customer base in the current area is, what it is likely to be in any other area, what the current cash flow is and whether or not the current operating procedures are able to keep up with customer demand. If all of these questions are answered in the right way then you can go on to look at expansion.
Research, review, analyse and identify what expansion would mean for your business, whether it's taking on more staff or moving location. The more you prepare and make sure you are ready, the better the expansion will go.
This blog post highlights some of the mistakes that can be made during expansion and what you can do to avoid them.
6. No Website
This isn't going to be the case for all businesses but most will find that a lack of a website could have caused them to fail. This is due to the fact that most people now look online in order to find items to buy and places to go. If your business doesn't have a website then you could be missing out on quite a large section of your audience. You could also be missing out on opportunities to sell items through an e-commerce website.
In order to get a website, you can either use a free website builder, paid for website builder or you can hire someone to build it for you, such as a designer. Take a look at our previous blog post on some tips for starting a web site.
7. Not having a clear USP
A business' Unique Selling Point (USP) is what sets them apart from their competitors, whether it's the fact that they offer the same product but in a wider range of colours or whether they have a different way of working. A USP can be used to attract customers to a business and should be made public and advertised.
Some businesses don't know what their USP is this is why they can fail; if a business is no different from it's competitors then why will customers choose the one over the other? Business owners need to think about what makes them different and advertise that fact.
8. Relying on a small number of customers
This is something that quite a number of businesses are guilty of, they get one to ten regular clients that bring in a lot of money to the business. But what would happen to the business if one or more of these clients stopped going to them? Sometimes it's better for a business to have a hundred small clients than it is for them to have ten big ones.
It's the same as the old adage "Don't put all of your eggs in one basket." Spread your business out and market to a range of different client types and market areas.
9. Pricing Failure
Some businesses are out of touch with the market standard on pricing their products, this can lead to the price being too high or even too low. If the price is too high then only a small number of people would be able to afford the products on offer. This can lead to a downturn in sales for the business. However, if businesses set the price too low it can put off potential customers as they think the product will be poor quality and cheaply made.
In order to overcome this, businesses should keep an eye on the general market price of their products and price them accordingly. If the business wishes to attract top end customers then they could increase their price slightly, but not too much. If they wish to provide the products at a cheap price in order to help the local economy or to gain clients then they could go slightly below the market average, but not so much that they harm their reputation.
10. Not seeking help
All business owners need help from time to time, this could be because they don't understand how to run accounts or because they are unsure about procedures and policies that need to be in place. If a business owner doesn't seek help this can seriously harm the business. It could be because the policy needed was a legal requirement, or because tax wasn't calculated correctly. This can lead to serious problems with the business.
Remember, everyone needs help from time to time, business owners can't afford to think that they know best or that they know everything.
These ten points can help you to avoid a business failure, there are of course other things that can go wrong in the business and this list is not complete. Remember to be vigilant and ask for help if needed.
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- 10 Mar 2017 - When is the right time to hire?