Why Most Businesses Fail
Even if your business isn’t failing, but just under performing what I have to say in this post is important. I have done a lot of business and investment workouts over the past 40 years. A workout for those that don’t know is the process of turning around a troubled business or investment and making it profitable. This can be done with or without filing for Chapter 11 bankruptcy protection. In this post I want to share some of what I’ve learned over the years.
Many studies have been done on why businesses or business people fail. While this is useful in helping us avoid unnecessary failures or set backs, we need to be careful not to focus on the negative. Instead of focusing on the negative we should devote more time to why or what can make our business succeed. But if our business is underperforming or failing it is extremely hard not to be worried.
In studying business failures or setbacks it is wise to first know something about ourselves and the way we view or perceive things that happen in our life. There is an old non-scientific method of determining personality types by placing a glass of water on the table with the water line at the half-way mark on the glass. Those with a natural pessimistic outlook towards life are said to view the glass as half-empty, while those with a more optimistic point of view are said to view the glass as half-full. Both answers are correct, but the explanation tells us something about the observer. So how do you usually view life?
I have noticed this half-empty, half-full perspective when listening to different advisors to a business propose solutions to cash flow problems. The companies books might clearly show that a company is losing money. The companies financial advisers, CPA’s, etc. (not all CPA’s think this way, but most seem to) come to the conclusion that expenses need to be cut to bring spending in line with revenue. The CPA views the glass half-empty and concentrates on the expense side of the equation (Bankers also have a tendency to view the glass as half-empty). But the most successful entrepreneurs I’ve met, even if they are experiencing setbacks, see the problem as a revenue problem, not an expense problem. The entrepreneur believes that if revenues increase they will cover the cash flow shortage. The entrepreneur views the glass as half-full. So which view is right?
Both are right, but taken to extreme either view can be wrong. One solution executed alone can spell disaster for the company. A successful entrepreneur tempers his view with sound judgement and wisdom from above. Because in trouble times the first approach to cash flow problem is to look at the expenses of the business I like to ask this question, if I cut an expense what is that cut’s impact on revenue.
So, why do businesses fail?
1. Not called by God into business When I first started giving the Christian Business Solutions Basic Entrepreneur Seminar I was thrilled at the positive comments that I received. But one comment stood out amongst all the rest. A man in his mid-thirties approached me after the first evening session and told me that I had provided him a great service and he wanted to thank me for conducting the seminar. As he turned to leave I asked what was the most significant thing he had received from the seminar. And his answer stunned me. He said that he had learned that God had not called him to be an entrepreneur, had not called him to start his own business and that now he could be content to go back to his job and work there as unto the Lord.
2. Entered wrong business
Many people are entrepreneurs in search of a business. Their hearts desire is to own a business, any business and they search for one that will provide them with the rewards they desire. They buy magazines and attend seminars that advertise businesses for sale and business opportunities. They would like a franchise opportunity or a chance to purchase an existing business. They would do a “start-up” if they could come up with a good to great idea. They are looking every where they can think of to find that one opportunity that will let them be “self-employed”.
Entered over crowded market
There is nothing wrong with entering an overcrowded market if you have built a better mousetrap, if consumers are looking for a better mousetrap, and if you have the resources to market your better mousetrap to those consumers. Or if you know beyond a shadow of a doubt that the Lord has called you into that market place. Those that succeed in business offer products and services and people need and/or want to buy.
Do not offer what people want to buy
You can have a great product or service. You can be 100% convinced that people need it, but if the people aren’t convinced they will not buy what you have to sell.3. Lacked sufficient knowledge
Often people that have been called to be in business assume that the calling alone is sufficient enough to guarantee success. The attitude is “If God called me, he won’t let me fail.” Such an attitude leads to failure, not success. The apostle Paul told Timothy to “Study to shew thy self approved a good workman.” It is important that as an entrepreneur you learn every aspect of your business. It is true that good leaders are often the best delegating workloads, but you need to have a good working knowledge of what the job is of the person you delegated responsibility to. Most business people have a good working knowledge of their business from an operational point of view, but fewer have a good working knowledge of the business side of business.
Legal, accounting and financial
It is true that you can hire the legal, accounting and financial work of your company to be done for you. In fact, for the most part this is what you should do. But it is important that you have a good working knowledge of every facet of your business and the details that can effect your business. I believe it is important to at least know many of the key questions that a business owner should ask if his advisors. Later in the book we will detail how to select and manage these key business advisors, along with how and when to use them.
Purchasing & inventory control
Virtually all businesses make purchases. It can be as simple as purchasing stationary and every day business supplies to the raw materials needed to produce a finished product your company sells. It may be that you have a retail store that stocks merchandise to be sold or an auto repair shop that stocks certain parts needed to operate your business efficiently. Whatever your situation you or someone for you will make purchasing decisions. These purchases turn cash or credit into inventory. How much inventory you need to carry is a crucial decision for your business. Too much inventory can hurt your available cash supply or credit and too little inventory can mean your business does not run efficiently or worse looses business to competitors because they are ready to supply what your customers want now.
If your business is going to require more than just a supply of paper clips, rubber bands and note pads then you need to have a good idea as to what is the right inventory for your particular business at this stage of your businesses life cycle. This is where having good advisors can help. CPA’s, bankers, the Small Business Administration can be a wonderful source of information in regards to purchasing and inventory control.
Employee relations
If your company has or is going to have employees then you need to learn to think like an employer, like an intelligent and informed employer. You need to know or be advised how you can, will or may treat applicants for employment, current employees future employees and even past employees under current laws (both federal, state and even local).
Marketing & sales
Marketing is the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives (this is the official definition of the American Marketing Association). Sales promotions according to the American Marketing Association (AMA) are those marketing activities, other than personal selling, advertising, and publicity, that stimulate consumers to buy and that boost dealer effectiveness. Examples include displays, trade shows, and expositions, demonstrations, and other selling efforts that are out of the ordinary routine. In addition to these examples, this broad definition embraces many kinds of activities, including in-store displays, sampling, coupons, contests, trading stamps, price-off deals, premiums, refund offers, sweepstakes, and rebates.
Without knowledge of what it takes to get a potential client or customer to actually purchase or buy your product or service your business will probably fail. The attitude, build it and they will come is relying on luck, not good business planning. Again business owners do not need to be experts in marketing and sales but they at least need to know someone that is and use this person or group as a resource.
4. Failed to keep pace with changing marketplace
There are several classic examples of businesses that continued to make products designed for soon be obsolete technologies. The company that continued to make buggy whips with the advent of the automobile. Or the today companies that do not take advantage of computers and modern technology to increase their companies productivity.
5. Not enough capital Often sited as the number one cause of business failures, this is most often not the real reason businesses fail. While there are times when more capital solves problems, I believe we should see if other solutions are first available. In too many situations that I’ve seen more capital will only compound the existing problems, not solve them. Not enough capital can be one of those great transfer the blame excuses for failure. More capital needs to seen as part of the solution and most often not the sole solution.
6. No business plan
A good business plan does not guarantee success, nor does it guarantee that you won’t experience failure or set backs, but it does limit the number of things that can go wrong. Many times ideas, products, game plans are changed because of the planning process. The planning process forces us to think through, hopefully to a logical conclusion the different thesis that we are using to start or build our business.
No vision, blueprint or pattern from the Lord.
This I believe is the number one reason businesses fail or continue to underperform. The owners either never had a clear vision, blueprint or pattern or they have compromised the original. If you do not have a clear vision and a detailed blueprint from the Lord, then may I suggest getting one. If you have one and you’re not succeeding then you have to find out if you’ve compromised the vision. If compromised then find out how to get back on vision.
I know this is short but I pray it gets you thinking.
Blessings upon you and your business.