Ten Common Causes of Business Failure

Failure is a topic most of us would rather avoid. But ignoring obvious (and subtle) warning signs of business trouble is a surefire way to end up on the wrong side of business survival statistics.

What’s the survival rate of new businesses? Statistically, roughly 66 percent of new businesses survive two years or more, 50 percent survive at least four years, and just 40 percent survive six years or more. This is according to the study “Redefining Small Business Success” by the U.S. Small Business Administration.

Learn how to avoid the most common pitfalls in strategic planning here.

With this information as a backdrop, we’ve put together a list of 10 common reasons businesses close their doors:

  1. Failure to understand your market and customers. We often ask our clients, “Where will you play and how will you win?”. In short, it’s vital to understand your competitive marketspace and your customers’ buying habits. Answering questions about who your customers are and how much they’re willing to spend is a huge step in putting your best foot forward.
  2. Opening a business in an industry that isn’t profitable. Sometimes, even the best ideas can’t be turned into a high-profit business. It’s important to choose an industry where you can achieve sustained growth. We all learned the dot-com lesson – to survive, you must have positive cash flow. It takes more than a good idea and passion to stay in business.
  3. Failure to understand and communicate what you are selling. You must clearly define your value proposition. What is the value I am providing to my customer? Once you understand it, ask yourself if you are communicating it effectively. Does your market connect with what you are saying?
  4. Inadequate financing. Businesses need cash flow to float them through the sales cycles and the natural ebb and flow of business. Running the bank accounts dry is responsible for a good portion of business failure. Cash is king, and many quickly find that borrowing money from lenders can be difficult.
  5. Reactive attitudes. Failure to anticipate or react to competition, technology, or marketplace changes can lead a business into the danger zone. Staying innovative and aware will keep your business competitive.
  6. Overdependence on a single customer. If your biggest customer walked out the door and never returned, would your organization be ok? If that answer is no, you might consider diversifying your customer base a strategic objective in your strategic plan.
  7. No customer strategy. Be aware of how customers influence your business. Are you in touch with them? Do you know what they like or dislike about you? Understanding your customer forwards and backwards can play a big role in the development of your strategy.
  8. Not knowing when to say “No.” To serve your customers well, you have to focus on quality, delivery, follow-through, and follow-up. Going after all the business you can get drains your cash and actually reduces overall profitability. Sometimes it’s okay to say no to projects or business so you can focus on quality, not quantity.
  9. Poor management. Management of a business encompasses a number of activities: planning, organizing, controlling, directing and communicating. The cardinal rule of small business management is to know exactly where you stand at all times. A common problem faced by successful companies is growing beyond management resources or skills.
  10. No planning. As the saying goes, failing to plan is planning to fail. If you don’t know where you are going, you will never get there. Having a comprehensive and actionable strategy allows you to create engagement, alignment, and ownership within your organization. It’s a clear roadmap that shows where you’ve been, where you are, and where you’re going next.

Running an organization is no easy task. Being aware of common downfalls in business can help you proactively avoid them. It’s a constant challenge. We know, but it’s also a continuous opportunity to avoid becoming one of the statistics.

Comments

34 Comments

  1. chris says:

    This article is apt for everyone who’s planning to make a business, i admire this article so much ths more clear, understandable and realistic. I really appreciate this information, thanks for those people behind this informative thing.
    thumbs up!!!!!!!!!!

  2. David says:

    I have been looking at countless articles on why businesses fail. This one seems to make the most sense.

    Thanks!
    David

  3. BHUKIE says:

    Wonderful article thank to those behind this am really happy to read this article,u will be blessed in Jesus name (amen).

  4. BHUKIE says:

    Awesome article

  5. Joel says:

    The article is very helpful and I have been assisted by it keep posting helpful thing.

  6. Benard says:

    I found this useful to us in Africa; especially Uganda

  7. faith ojo says:

    why is small business fail

  8. Okpoh Sunday says:

    Item number 8 is an eye opener for me thanks. More grace!

  9. Benard says:

    I found this useful to us in Africa; especially Uganda lol

  10. David says:

    I have been looking at countless articles on why businesses fail. This one seems to make the most sense.

    Thanks!
    David

  11. Joel says:

    The article is very helpful and I have been assisted by it keep posting helpful thing.

    Shot guys

  12. Roger says:

    Cash flow or lack thereof is the #1 thing I evaluate when helping a company turn their business around. I am not disagreeing with any one of the 10 but unless you have enough cash you may not have enough runway to fix any one of the other 9 items to turn the situation around.

  13. Eric Daly says:

    I thought I would have a look at the article and then add something that was missed as I have good understanding of these issues. Well darn and hats off Todd Ballowe. You have covered all the issues in a very tightly worded manner. Well done.

  14. edson nyahwa says:

    your article is good. keep on posting such important stuff. the information is helpful. thank you very much.

  15. Tyrone Bryant says:

    Right on point about why some businesses fail??

  16. Bul Garang says:

    This is the richest article I have ever read while doing my research on the cause of business failure.

    thank to the author, Keep up.

  17. derick osei kofi says:

    am very grateful about this article

  18. Simon Peter says:

    The points are well put and straight to the point.

  19. wellington sibanda says:

    Thanks to the author we are now aware of whats causes our business to fail .

  20. Ashley Olsen says:

    Sir/Madam!
    The article is fine. If you don’t mind, please specify the internal and external factors that influence a business to success or to failure. Because, in this modern world, specification i every field is appreciated. The tips are good, but quite mixed, please categorize them, thankyou

  21. Daniel says:

    woo
    ,this article is awesome.I have found what i was looking for

  22. komujuni winfred says:

    this article is so helpful cause it contains sense why bussineses fail

  23. georgia says:

    Great article! Covered a lot of perspectives. Most owners believe that “knowledge is power” however they should understand that only “applied knowledge” is only the power that works! -great point. Came across a blog on Buymaster.co which really compliments and adds to this article. Take a look http://blog.buymaster.co/why-small-businesses-fail-or-fail-to-thrive/

  24. macdonald kimani says:

    thanks this artical is very helpful

  25. Thulani Bhengu says:

    Wow , great article. it touches an interesting field that i’m studying “Strategic management Accounting” This field seeks to involve the marketing environment with accounting as the strategy to gain sustainable competitive Advantage in the market. Thus , this articles highlights the importance of strategic tools in the market.

  26. Joseph K Blackie Jr says:

    I am just a new comer in business, but I think this article can be a help for me.

  27. Karan Kukreja says:

    Its a nice article but its just that we read these kind of articles only after failing in business and there are mistakes that we do again and again..as much as your articles helps me to understand the common reasons for failure I would like to point out some major reasons in my own way:

    1) Lack of Capital- This is by far the most major reason for any business to fail although I am not saying this is the only reason. But it is often seen that people have capital to start up a business but in a long run they are not able to fulfil the internal and external demands of the business like salaries of staff, rent, raw materials etc.
    2) Lack of Managerial expertise: This is also a major reason. It is often seen first time entrepreneurs lack management skills like planning, organizing, controlling etc.
    3) Competition: This also plays in the success or failure of any business. Before or even after starting a business one must know who there competitors are and what are there strategy like what is the price of the products that they are offering, similarly quality,finish etc. Know your competition.
    4) Random: There are many other reasons like understanding the needs and mentality of the customer. Know their likes and dislikes, their paying capacity, handling raw materials, keeping proper money/cash flow and accounting the same at regular intervals, having an open thinking and attitude, and their could be many that might not be present in what all I have stated. Please do give a feedback on this one

  28. ogaya jackson says:

    owesome

  29. kamil hosseinzadeh says:

    i found this article very useful , i have 40 years experiance in managing various business . thank you

  30. Maisha k says:

    Thaxs I loved the article since it opens up peoples’ minds.

  31. Ubed Shaiikh says:

    Must say, this is an excellent article.

    Covers the most important point in perfect details with no extra fluff.

  32. diane says:

    It’s a great article and very knowledgable here are some pointers hope this could help you
    1) Lack of Capital- This is by far the most major reason for any business to fail although I am not saying this is the only reason. But it is often seen that people have capital to start up a business but in a long run they are not able to fulfil the internal and external demands of the business like salaries of staff, rent, raw materials etc.
    2) Lack of Managerial expertise: This is also a major reason. It is often seen first time entrepreneurs lack management skills like planning, organizing, controlling etc.
    3) Competition: This also plays in the success or failure of any business. Before or even after starting a business one must know who there competitors are and what are there strategy like what is the price of the products that they are offering, similarly quality,finish etc. Know your competition.
    4) Random: There are many other reasons like understanding the needs and mentality of the customer. Know their likes and dislikes, their paying capacity, handling raw materials, keeping proper money/cash flow and accounting the same at regular intervals, having an open thinking and attitude, and their could be many that might not be present in what all I have stated. Please do give a feedback on this one https://www.meshcowork.com/en/blog/read/620446883/failure-in-entrepreneurship

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