Document details Author Understanding why many new businesses fail Bizwise Going into business without doing the relevant background preparation frequently leads to business failure which in turn will usually involve loss of money and often self esteem. Publication Date: 18/04/02 Understanding why many new businesses fail Many people may at some stage in their life and career decide that they would like to start their own business. The reason for this decision is varied, generally many people find the prospect of being their own boss, taking all the decisions and the profits an attractive and exciting challenge. Anyone contemplating going into business should only do so after undertaking adequate market research into their intended products/services, competitors and potential customers. This careful market analysis should run alongside a well thought out and presented business plan. It is also critical to have a period of reflection about the personal skills and attributes needed to be a successful entrepreneur. Going into business without doing the relevant background preparation frequently leads to business failure which in turn will usually involve loss of money and often self esteem. What can go wrong? The simple answer is that many different things can go wrong. These can range from failure to sell your products/services through to quality and production problems. No single factor can be identified as being the reason for all business failures as each business is different and will be affected by it’s own special circumstances. It is important to be aware that around 80% of businesses fail in their first 4 years of trading. Even if you start your new venture having done all your preparation and with the relevant skills and expertise you still run a high risk of failure. There are no guarantees of success. However there are ways to reduce the risk of failure including buying into a well established business with over 4 years healthy trading or buying a franchise with a proven formulae. By knowing and understanding your market you stand a greater chance of being one of the 20% who are successful. The key reasons for failure The majority of business failures are due to one or more of the key factors below. A single factor may lead to a business failing or it might be a combination of factors that ultimately lead to its downfall. If you are thinking about starting a new business or are indeed currently operating a business, you should look carefully at how your operation intends to handle these key factors. Appropriate planning, monitoring and taking relevant action at appropriate times will often help to overcome small problems that could eventually turn into far more serious issues. The key factors for failure include:-• Lack of planning • Lack of adequate finance • Bad location • Lack of or poor marketing activities • Failure to respond to market changes by investing in new technologies or changing operational practices • Failure to keep up with the competition • Partners falling out • Poor management practices • Lack of skilled employees • Lack of quality control • Poor levels of customer service • Lack of effective cost controls • A poor financial infrastructure -remember to send invoices out on time, make sure they go to the correct place and person and chase up all outstanding debts as a matter of urgency. You should be aware that all of the factors above could have a knock on effect on others, which may lead to one or more of the others becoming a problem. For example, lack of adequate finance may affect the level or type of marketing activities you undertake because the funds are not available to follow the marketing strategy of your choice and you are forced to compromise. Also a lack of skilled employees may adversely affect your customer service, as staff are either untrained or incapable of providing the standard of service you would expect. Never ignore these issues, as they will not go away. Businesses, which fail, have usually either ignored such issues or are unable to deal with them. Don’t become a statistic take the necessary action as and when any problems arise. What steps can I take to minimise the risk of failure? Once you embark on a new business venture it is important that you take a few key steps to keep the business on track. One of the most critical factors is to constantly monitor the business and make adjustments as necessary. You should consider using the reasons for business failure above as a checklist and ensure that you take action if you spot weaknesses in any of the areas. You should also review your business plan regularly and aim to stick to your budget. If your sales are not as high as expected adjust your expenditure where possible to balance the books. Make sure that you remain in touch with your market, customers and the competition and change your business model to ensure you remain at the leading edge. If you find that despite all your hard efforts your business is on a downward spiral and even though you have taken steps to rectify problems there does not appear to be any improvement you should confront the problems head on. Don’t avoid the issue as this may only lead to a larger financial loss, know when to cut your losses. This might seem like admitting defeat however some business failures cannot be prevented and its far better to cut your losses than to lose everything.