Why do Businesses Fail?

Why Do Businesses Fail

According to a study conducted by the Organization for Entrepreneurial Development (OED), failure rates for startup businesses are high:  within the first 2 years 30% go out of business; after 5 years the number rises to 50%; and after 10 years 67 to 75% have closed their doors.

When you talk with a typical business owner of a failing business, he or she will say some variation of the following:  “My business has problems and I’m in pain; there is no-one to talk with and the business has become a nightmare.  There are opportunities but I am frustrated by not being able to seize them.”

Peeling back the onion layers of small businesses struggles and failures, there are common themes.  You’ll see them expressed here in blunt terms:

  1. Lack of planning: no business plan, no financial plan or budget; most of what happens is ‘by the seat of the pants’ or by accident.
  2. Inadequate funding: not enough money to get out of the gate successfully, no profit plan, misuse of funds or poor monetary controls, no budgets, no forecasts, no bookkeeper and too much optimism.
  3. Ineffective marketing:  poor product positioning, customer identification, or customer service; incorrect pricing; lackluster or disorganized promotion and lost revenue creation or enhancement opportunities due to poor planning.
  4. Ineffective sales:  insufficient sales to sustain the business, lack of sales controls and projections, no formal process or structure.
  5. Lack of employee management: wrong people in the wrong jobs; poor people management skills; improper staffing levels, poor hiring and firing processes, lack of job descriptions or employee controls.
  6. Lack of business owner / leadership experience:  poor use of time and resources; lack of delegation; paternal leadership and management; dictatorial or no control.
  7. Lack of outside expert advice: the entrepreneur has not yet found the required knowledge or failed to allow it to find him / her.

So why are owners not addressing these problems?  Three common reasons: they are distracted by other tasks or issues; they don’t like to work on the problem and therefore avoid it; or they just haven’t found a way yet as they lack the skills, knowledge or resources or are too proud to ask for / be open to help.