Why Businesses Fail - Start Up Business Failure Alone In The UK Has Reached 80% In Its First Year

Published: 07th September 2010
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Starting a business can be a worrying and daunting time for would-be entrepreneurs. With three out of five business start-ups ending up in failure and a higher percentage failing to make it past the five-year mark, the statistics are stacked against business owners. But knowing the reasons why businesses fail could just be the key to making sure yours doesn't!

Today we find product/services that once have been in the market place but are no more in existence. Perhaps you may have started a business before and right now are no more in business, maybe the failed business left you in terrible debt.

Failure in business can be very devastating and sometimes traumatic as I have had my own share of failed business so from my experience I'm able to share the highs and lows especially when it means to fail.

When buddy entrepreneurs come up with the idea of starting a business, they don't intentionally plan for failure, they just fail to plan. That's how the saying goes. We all believe we are doing the best we can to improve chances for success. Some causes for failure are within our domain and some are not. While companies may blame the economy, failure is more likely of misjudging the customer, poor understanding of market drivers, and/or inefficient management systems.

My guide will show you how to overcome these pitfalls that other business start-ups have made and can stop you making the same mistakes, keeping bankruptcy out ultimately staying on your course to success. The following are the key reasons I believe for business failures in the marketplace. See if you can identify with any of these.

Lack of Planning and Failure to Organise Detail
Possibly the main reason why so many of businesses fail is due to a lack of planning and research. Not thinking about the customer, marketing and sales beforehand. Not getting feedback from potential customers, not understanding the buying process of the customer, not determining the product cost and selling price beforehand. Anyone who has developed and launched a product or ever been in charge of a successful major event knows that were it not for their careful, methodical, strategic planning, attention to small detail -- and hard work -- Success would not have followed. The same could be said of most business successes. It is critical for all businesses to have a business plan which can also be very useful if seeking capital or attracting business Angels. Fundamental shortcomings in business planning are a cause to many businesses failure. Your plan must be realistic and based on accurate, current information and educated projections for the future. A business idea may seem to be "brilliant" to a potential business owner but how brilliant is it in reality? You need to establish if your idea, product or service is marketable, and how profitable it would be to turn your idea into a reality. Components of your business planning may include: Description of the business, vision, goals, and keys to success;
Work force needs, Potential problems and solutions; Financial: capital equipment and supply list, balance sheet, income statement and cash flow analysis, sales and expense forecast; Analysis of competition; Marketing, advertising and promotional activities; Budgeting and managing company growth

Poor Management & Inventory
Another major reason for business failure. New business owners frequently lack relevant business and management expertise in areas such as finance, purchasing, selling, production, and hiring and managing their employees. Unless you recognize what you don't do well, and seek help, you may soon face disaster. You must also be educated and alert to fraud, and put into place measures to avoid it.
Neglect of your business can also be its downfall. Care must be taken to regularly study, organize, plan, control and timely execute all activities of your operations. This will include the continuing study of market research and customer data, an area which may be more prone to disregard once a business has been established.
A successful manager, either yourself or someone you hire would be a good leader who creates a work climate that encourages productivity. You will need the skill at hiring competent people, training them and delegating task.

Cash Flow or Poor Credit Arrangement
It is essential to firmly keep on top of your business cash flow management for as soon as a business loses sight of this then they are prone to failure. Plot and analyse your in-comings and out-goings to make sure your business stays on the right track. Late payers can cause havoc and even threaten the future of your enterprise if invoices go unpaid for too long. And if you have a lot of delinquent debtors that are not paying as such you have more money outside than inside your accounts then you are certainly heading for bankruptcy. Arrange payment plan in advance and make sure structures are in place to pursue debt and recover money. You must always keep funds aside to settle your tax bills, changes in market conditions that affect your production cost and don't be reluctant to seek help if you are concerned about the financial health of your business - you are far more likely to survive if you face up to cash flow problems early on. Also don't expect massive profits from the outset, but don't tolerate loss either. It is also very important to remember to keep your business integrity intact delivering product and service as agreed as per contract since it usually has a direct connection to your cashflow.

Lack of Strong Vision, Purpose and Drive
From my experience, it is very hard to set up a new business unless you have a strong vision, purpose and drive. A lot of potential business people do not really understand what it takes to be an entrepreneur or run a successful business and so go into business for wrong reasons. In order to be successful in business you will need a strong vision, purpose and 100% commitment. A good business person and leader will need the skill of strategic thinking, ability to make your vision a reality, and ability to confront change, make transitions, and envision new possibilities for the future. Those without these attributes will not be able to succeed. In challenging times they will give up, cave in and pack up business. It is important to know successful business owners are those who can manage crisis and challenging times and will be prepared to take some risks to realise their dreams. As long as you don't give up you cannot fail. You are not a failure until you keep on trying.

Disloyalty of Employee and Employer
Disloyal employees and employers can plunder a business. You need to have the right people doing the right jobs to succeed. Mismanagement of business resources can lead to business failure. Employees need to be managed properly, and feel rewarded for their efforts to curb disloyalty. Employers or business owners can be disloyal to their business through misallocation, mismanagement and personal use of business funds. A Start up business needs a good cash flow to stay in business so profit should be re-invested until at least 3-5yrs when business is stabilised. A good business owner would also require good strategy, discipline and planning.

Lack of Experience and Misplacement
Another major reason for business failure is incompetency. Many businesses start off with one or two people doing all the jobs (from accounting to sales and even technology), however there is a danger of getting swamped by the sheer volume of work especially if you lack key experience in specialist areas or in how to run type of business. If you are in a business that does not match up with your personality "value", skill and experience you may be misplaced. Paying for other people to help will often pay dividends, both in providing expertise with the right skill and trade secrets for your business, but also by freeing up your time to concentrate on the broad picture, your areas of interest and strength. Before going into business you ought to answer key entrepreneurial questionnaires, fully understand what you're getting involved with its legal stipulation and have structures in place. Generally to succeed in your chosen type of business you must be trained, talented or anointed for that kind of business.

Lack of Self, Product or Service Development and Business Connections
As a start-up business you cannot afford to remain motionless as your market and the world around you drives forward. Adapt and develop your business and brand so it is forward thinking and innovative, not behind with the times as to stay competitive in the market place. Attend trainings, business seminars, synergize and network with like-minded people, join associations to stay informed and embrace technology. Because if you're not inspired, your will expire. If you're not updated, you will become outdated. If you're not informed, you'll be deformed. When you lack these things you suddenly discover you are put out of business.

You will need to consider the competition when developing, pricing and marketing your business. You will need a thorough investigation to find out more about them, their strategies and be a step ahead. You will need a definite unique selling point say in your product/service functionality, pricing, quality e.t.c to gain an advantage above your competitors in the market place and leverage your business

Poor Location
Your college professor was right. Location is critical to the success of your business. Where you locate your business is strategic to the success of the business. Many businesses are located poorly to the detriment of their possibility of succeeding. Whereas a good location may enable a struggling business to ultimately survive and thrive, a bad location will incite low sales, lack of customer and spell disaster to even the best-managed enterprise. Imagine you are to start a luxury furniture store and are to be located in a place where unemployment is high or the highest income earner would require a few months salary to buy an item in your store then you are in the wrong location. You will need to consider factors such as where your target market are, traffic, accessibility, parking and lighting, location of competitors, condition and safety of building, local incentive programs for business start-ups in specific targeted areas, history, community flavour and receptiveness to a new business at a prospective site. Commonly successful businesses are located strategically on the high street in a high foot, vehicle traffic areas or in todays information age online business traffic is the growing trend

Insufficient Capital (Money)
A common fatal mistake for many failed businesses is having insufficient operating funds. If you underestimate how much money is needed you will be forced to close before even having had a fair chance to succeed. You also may have an unrealistic expectation of incoming revenues from sales. Its common practice many business start-ups use their own funds during the start-up process. Other businesses may need to source extra funding from angel investors, banks and other lenders. It is imperative to ascertain how much money your business will require; not only the costs of starting, but the costs of staying in business. It is important to take into consideration that many businesses take a year or two to get going. This means you will need enough funds to cover all costs until sales can eventually pay for these costs. Again, if you are seeking funding from investors who are not related to you will need to be convinced that the start-up idea is a good one - which is why you should take time on research before starting up, and have a business plan in place.

A leading cause of business failure, over-expansion often happens when business owners confuse success with how fast they can expand their business. A focus on slow and steady growth is optimum. Many of bankruptcy case have been caused by rapidly expanding companies. At the same time, you do not want to repress growth. Once you have an established solid customer base and a good cash flow, let your success help you set the right measured pace. Some indications that an expansion may be warranted include the inability to fill your customers needs in a timely fashion, and employees having difficulty keeping up with production demands. If expansion is warranted after careful review, research and analysis, identify what and who you need to add in order for your business to grow. Then with the right systems and people in place, you can focus on the growth of your business, not on doing everything in it yourself.

Overinvestment in Fixed Assets
Fixed asset turnover is the ratio of sales (on the Profit and loss account) to the value of fixed assets (on the balance sheet). It indicates how well your business is using its fixed assets to generate sales. A higher ratio is better because a high ratio indicates your business has less money tied up in fixed assets for each dollar of sales revenue. A lower or declining ratio may indicate that your business has over-invested in plant, equipment, or other fixed assets. It's important for business owners to draw up a viable asset acquisition plan and ensure they produce optimum returns daily or monthly in running the business

Rapid, Unexpected Business Growth
It should be any entrepreneur's dream come true when it is anticipated and prepared for adequately. But for some startups, a sudden, overnight explosion in growth can nearly bring the operation to its knees. Poor feasibility study, planning and lack of foresight is a cause to this business failure. When business owners get into existing or new areas of business providing a unique service, the possibility of generating offline and online buzz is sufficient to capture prominent media attention. A positive coverage can quickly send a flood of new customers and for an offline store can result in long lines whilst online, it can cause servers to go down. Rapid, unexpected growth will certainly place a huge demand on your resources and having contingency plans for expansion to meet up with rapid growth is vital. Knowing how to raise emergency capital when the sudden need arise and a readiness of your key suppliers to deliver according to business demand even at short notices

Lack of Good Humanitarian Service
This might seem the least worry for some businesses and could be the least reason why businesses fail in the eye of a business expert. But it is very important to realise that giving back in whatever capacity is necessary so that your business receives the thanksgiving and longevity that it deserves. You will need to remember what your business make happen for others in return happens to you.

Lack of Online Presence and Publicity
Simply put, if you have a business today, you need a website! Period. You will need to put your product and service where it can best grab the attention of people so that they know you have what they need. And there is no better place than the massive online world. It is the fastest moving community and the new way of making huge profits. It is said that facebook alone, the social networking site and at the time of writing has over 200 million users and If were a country would be the world's fifth-largest, after China, India, the U.S., and Indonesia. In the U.S. alone, the number of internet users (about 70 percent of the population) and e-commerce sales (about 70 billion in 2004, according to the Census Bureau) continue to rise and are expected to increase with each passing year. In 2004, the U.S. led the world in internet usage. At the very least your business should have a professional looking and well-designed website that enables users to easily find out about your business and how to avail themselves of products and services you offer. You would want to take advantage of free socialmedia platforms like facebook, twitter, youtube in driving huge targeted free traffic to your business. Measuring your campaigns is of utmost importance so you'll know how successful you are and where to focus your efforts more. Later, additional ways to generate revenue on your website can be added; i.e. selling ad space, drop-shipping products, or recommending affiliate products. Remember, if you don't have a website, you'll most likely be losing business to those that do. It is no surprise today those new offline businesses employing good marketing strategies can literally divert their local online traffic to their websites and stores eventually dominating your location. Even with your credentials as a long established business, you realise customers are dwindling and your competitors are gaining a fair advantage. So you would want to make sure that website makes your business look good, not bad -- you want to increase revenues, not decrease them and when it comes to the success of any new business, you -- the business owner -- are ultimately the "secret" to your success. For many successful business owners, failure was never an option. If you're armed with drive, determination, a positive mindset and with what not to do in your business, you are able to view any setback as only an opportunity to learn and grow. Most self-made millionaires possess average intelligence. What sets them apart is their openness to new knowledge and their willingness to learn whatever it takes to succeed.

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