Why businesses usually fail

Businesses come and go, we see them opening up, struggling for a few years and closing their doors.

We might even hear that they offered something that we were searching for, after they have closed down.

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But why do they fail?

According to the NFIB, over the lifetime of a business, only 39 per cent are profitable, 30 per cent break even, and 30 per cent lose money, with one per cent falling in the "unable to determine" category. Many research organizations suggest that the leading cause of business failure is undercapitalization or lack of cash that a business has to give the owners time to get to profitability. My experience with businesses and business owners over the years would suggest that while this may be the case that the businesses do run out of money and are forced to close up, the underlying causes are different.

1. Lack of clear vision - many business are started because someone has an idea that they could make a lot of money opening a business. This would mean that they don't have to work for anyone else, can make more money than they would as an employee and can be in control of their future. The lack of a concrete vision of how this is going to transpire along with a lack of business experience or skills necessary to ensure success are paramount to the failure of the business being profitable in the long run. There are a variety of tools that business owners can use to ensure that they create a vision for where they are going. These include things like the One Page Business Plan, working with organizations that help start-ups, and even business colleges or universities that have students eager to work on research projects. Michael Gerber in his book the E-Myth Revisited suggests that entrepreneurs need to think about what the business is going to be in five, 10 or 25 years down the road and start building towards that.

2. Lack of value - often entrepreneurs see someone else doing something and figure they can do it just as well. The problem with this model is that the established business already has customers and the value proposition of the new business is not great enough to ensure that customers flock to them. Any business has to know why its product is so much better than its competition. What are you doing different that is going to ensure that customers want to buy from you? What is it about what you are selling that makes your customers life better? What pain are you relieving or what pleasure are you stroking for your customer? As a result a business could struggle along for years marginally without knowing what went wrong or considering the opportunity costs associated with starting a business. The lack of understanding clearly the need for a strong value proposition and the inability to convey the value to the customer has been the downfall of many businesses.

3. Lack of business knowledge - I have worked with many highly skilled people who own their businesses and are extremely talented at what they do. The problem lies when these business owners become successful as a result of their skill and their business grows. The skills that enabled them to be successful as a very tiny business have been outgrown by their success. This can lead to problems. In addition, many entrepreneurs are blind to their lack of knowledge in areas that could lead to their success. In other words, we have technicians starting a business because they know everything about how to build a product or service but fail to realize that they don't have the knowledge around how to communicate with the customer, price the product or lead the employees.

4. Micromanagement - there are only so many things that a business owner can do in a day. It seems like weekly I talk to another owner of a business who is working 50, 60, 70 or more hours in a week. These people often tell me that if they don't do something, it won't get done. That nobody can do it just like they can or that they feel that they need to lead by example and show their staff that they work harder than anyone in the company. The problem with this picture is that when this happens owners become burned out. They become overwhelmed by the growing mountain of jobs that need to be done and the never ending work pile. They feel aggravated when staff ask for time off for holidays or family life because they don't give themselves that time. Once burnout sets in, entrepreneurs start making decisions that aren't wise, they fail to hire staff that can bring skills they don't have, or if they have hired these people their micromanagement overrides decisions that could improve the business. This lack of leadership paralyzes the business and leads to narrow sightedness resulting in business failure over time.

5. Marketing failures - every successful business has one thing in common. They are able to connect with their customers and provide a product or service that the customer is willing to exchange for money. The road to failure is littered with the history of businesses that had great products but for one reason or another were unable to convey the message to their prospective customers that they had something of value. Sometimes business owners think that advertising is an expense and as a result don't advertise and fail to reach their customers. Often I work with business owners who are advertising and it is an expense because they are pouring money into the quicksand of conventional wisdom that suggests that you have to advertise and you will automatically be guaranteed results. These owners might in some cases be better off to put that money in their pocket, or give it away to charity. The problem with most advertising is that it is not measured. In other words we advertise our product or service and don't' determine if we got customers or sales as a result. With great advertising comes great results. The secrets of great advertising include knowing who is your target market and figuring out the message that is going to reach them. If you can do that, there is a good chance that your business is going to be successful!

In order for a business to be successful owners need to have a clear vision of where they are going and have the skills or team to take them there. If they have a product or service that is priced for profit and seen as valuable to their customers and the business is able to reach those customers and clearly convey that value, success is almost guaranteed.

-- Dave Fuller, MBA, is an award-winning business coach and the author of the book Profit Yourself Healthy. Email dave@profityourselfhealthy.com

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