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What are the Reasons Why Businesses Fail?

Having been a small business owner and consultant for twenty-plus years, I had the opportunity to learn from my own mistakes, as well as, seeing the business failings of others.  I have learned that there are unquestionably reasons why a small business fails; why some are successful; and why certain types of people are more successful business owners and entrepreneurs.  The good news is most successful small business owners had many failings before achieving a level of success, and the object of this article is to identify their (and my) mistakes.

Not Enough Capital

When starting a business, an entrepreneur needs to first bring sufficient cash to the venture.  I recommend a minimum 10% of the total funding amount to come from Owner’s Equity, with 20% being optimum.  Having a strong equity stake in the beginning of a Company’s life makes acquiring the additional capital much easier and less expensive.

Strong Owner’s Equity shouldn’t stop afterward a Company’s start up point.  A Company’s strength in Retained Earnings is key to growth the Company, seizing on market opportunities and sustaining futurity finance.  If you lack owner’s equity capital, there is additional undue pressure level on a Company’s cash flows, making it increasingly hard to obtain the appropriate funding. A Business Owner needs to become an expert in Business Finance or find an expert to work with. realiseing the relationship between equity, cash flow and finance is key to healthy, growing business.

Lacking the Right Business Knowledge

Successful entrepreneurs are typically well read.  They are always striving for more knowledge and take vantage of the wealth of resources offered through business schools and, as importantly, read other successful entrepreneur’s books. A Business Degree or MBA is a helpful foundation but gaining knowledge from those who have found success is decisively important to understanding why businesses fail, as well as, spawning new ideas and markets.

Inexperience in Important Areas

Inexperience ties in with Lack of Business Knowledge.  Business Knowledge can be acquired in school, through books and magazines, and via experienced business owners.  Business Experience is the critical and common link between successful entrepreneurs. Inexperience costs money when mistakes are made. Make too many mistakes, and you are out of business.  Mistakes are a natural part of the business learning curvature, however, minimizing them is very important to stay in business.  I highly recommend going into a business which you have experience and fondness while seeking out those who have been in the same business for a time and reached a significant level of success.  Experience comes with time, but you can also learn from the mistakes others have made before you.  Cultivate business relationships, mentoring opportunities and networking events and forums.  I can’t tell you how many times spending time with an experienced entrepreneur has paid off in spades, in my business life in so much as, what not to do, as what to do.

Ineffective Management

This is big. If you aren’t good at managing employees, recruit those who can  Some entrepreneurs are great at this vital skill and others don’t have the longanimity for it.  However, the bottom line is you can have a great idea, product and market, but poor management will cause business failure 9 times out of 10.  Poor management often evolves into poor employee morale and high employee turn-over, which significantly hampers a company’s ability to compete in the market.  Management doesn’t just mean employee management but also the ability to manage the Company.  Having a good Business Plan, first-class Profit Strategies, and effective Cash Flow Management are just some of the important management tools necessity to run a successful business.  Businesses often fail because they haven’t owned up to and analyzed their weaknesses, which often stems from poor management practices.

Poor Planning

The lack of SWOT Strategy or the poor implementation of a plan is typically the number one reason for business failure.  I see this a lot as Business Consultants. So why do small businesses omit to plan?  Because it can be a very difficult process to do well; day to day business activities leave them little time to plan; they fear the weaknesses and problems’ planning reveals; they lack the knowledge on how to effectively plan; or they feel the future can’t be planned for.

However, to be successful in a small business by relying solely on luck is a huge gamble and often meets failure.  You must know where you are going and how to get there.  A good Business Plan guides the entrepreneur on how to operate a business; interest investors and bankers on funding the business; provide deputation and motivating to employees; and establish an environment which will attract and retain customers and talented employees.

I have seen many instances where a business has a business plan, but it lacks the functional and control features to with success implement it and the strategic know-how to successfully link the marketing plan with effective financial modeling and forecasting.  Good planning is both Strategic, which is high-level, long commit goal setting and meeting of objectives, and Operational, which implements the Strategic Plan, operates the business and sets the policies, methods and procedures to do so.

Planning actually means good business management.  Inadequate planning often translates into poor management functions.  It is a process which relates and inter-relates closely to Managerial Functions. Many business Owners don’t understand the extent of these vital relationships, thereby producing inadequate plans, which ultimately lead to business failure.

Understanding the components of the Planning Process makes it much easier to develop and implement a good Plan:

• Planning:
  • Organizational Objectives
  • Establishing Programs, Policies and Strategies to fulfill the Objectives
• Organizing:
  • What Resources and Actions are needed to meet Organizational Objectives
  • Setting up Working Groups
  • Assigning authority and responsibility
• Staffing:
  • Select, train, develop, place and orient employees
  • Foster employee productiveness
• Leading:
  • Effective Communication and Motivation
  • Performance
  • Goal Achievement
  • Work Assignments and Direction
• Controlling:
  • Setting Standards
  • Measuring Performance
  • Corrective Action

The underlying reason why a small business fails often stems from poor Operational Planning, which needs to be part of a company’s  Business Plan Template.  Operational Planning is critical, since it helps business owners and entrepreneurs avoid costly mistakes, saves considerable time over the long term, and successfully bridges the gap between planning on paper and implementing the plan.  Three types of Planning, or Phases of planning, significantly improve a small business’s chance to achieve success:

• Pre-Start Up Operational Business Planning
• Ancillary Business Plans customized for Investors, Commercial Finance, Customers, Key Employees, Suppliers and the such
• Post-Start Up and Growth Continuous Planning and Control

The point I am trying to drive home here is that inadequate Planning stems from the fact that most small business owners fail to fully understand all of Planning’s parts, and how to effectively undertake and implement those parts into cohesive Operational and Strategic Plans, Goals and Objectives.

About the Article Author

Frank Goley is a business consultant, business turnaround consultant, and business planner for ABC Business Consulting. Frank is an expert in writing, developing and implementing business plans, business turnaround plans, business funding plans, marketing plans, strategic plans and web marketing plans. Frank offers comprehensive business consulting, business coaching, business turnaround consulting, along with web seo, web development and web marketing consulting, to small and medium size companies.. Frank is author of the business plan book, The Comprehensive Business Plan Workbook – A Step by Step Guide to Effective Business Planning, and he has over 50 published articles on business success strategies. He also writes the Business Success Strategies Blog.

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