Why Do Businesses Fail? | Four Reasons, Four Solutions
Have you wondered why a majority of all business ventures fail? And why so many entrepreneurs make the same mistakes? The answers might surprise you. (This is an abridged version of the original blazetrue article)
Most businesses fail.
Understand that as a fact, and think about that for a few seconds, before reading on.
Numbers vary from 66–90% — but the vast majority of all businesses fail within their first 10 years.
Which means that, if you take the path of a typical entrepreneur and do what most business owners do, then it is highly likely that your startup or small business too will fail.
That’s a scary thought.
So, what are the main reasons that so many businesses fail? Is there any way that you, as an entrepreneur, can prevent your venture from failing?
Let’s try to discover the surprising answers to both those questions.
1. Non-Starter
Without any question, the most prevalent cause of business failure and the worst way of failing in business, is when the entrepreneur never starts up.
He has an idea, she has a plan and then — nothing! They might talk about it to some friends, get enthusiastic about it at times, even criticize others who start similar businesses and — do nothing.
This failure is so sad that it does not even count as failure. Because to fail, to really fail, you have to try, to attempt, to risk, to do. The deep desire to try to make a difference is so intrinsic to what it means to be an entrepreneur that the non-starter totally misses the mark.
The non-starters may give themselves many reasons — but the end result is always the same. Stillborn dreams.
Simple truth: You cannot finish unless you start, and you cannot start unless you start.
You gotta show up to be counted.
SOLUTIONS
The solution is so very simple: Just Give It A Try.
No, you don’t have to take out a loan or mortgage your house to roll out your entire, 60-page business plan. Minimize your risks and implement the smallest scale version that your business idea allows.
Make one cake. Do one delivery. Offer services/goods to one customer. Create one basic solution, and deliver to one neighborhood or one building or one person.
Call it whatever you want — trial or test-marketing or proof of concept or whatever; but do it — and do it with passion and seriousness.
Once you have implemented this micro-version of your business, you will have taken that first step towards being an entrepreneur.
You will also have a basic proof of your concept. Or not. If not, you can analyse what went wrong and improve — or drop the idea and start with the next.
Yes! That’s all there is to it! So, go on.. think, plan and take that first baby step, because even the biggest businesses can start very, very small.
The Man Who Started Small
Karsanbhai Patel started very small in 1969. He sold his low cost detergent along the 15 kilometers bicycle ride to and from his office. Karsanbhai kept at it, and by 1985 something unbelievable had happened.
In a business dominated by global giants such as Unilever and Procter & Gamble, this one-man, part-time, zero-budget, bicycle-sales startup had become India’s leading detergent powder!
Karsanbhai’s great entrepreneurial zeal and willingness to upend conventional business thinking, grew Nirma into a multi-product, multi-segment giant with sales of over ₹ 7,000 crores.
Don’t you have more than a bicycle and zero budget? So, what’s stopping you?
Reading this, right now, and later thinking about it alone, if you feel that your idea, your vision of entrepreneurship does not quieten down, then don’t wait too long. Give the smallest scale version a try. It’s easy.
At any rate, it is far easier than knowing for the rest of your life that you didn’t even try.
2. Non-Belief
The fundamental, most common cause, of real business failure is that the entrepreneur does not offer the belief and care that is needed to sustain and nurture the business.
Many people think it is bad planning, cash crunch, competition, government regulations, lack of money, bad market etc. that cause a business to fail. Sure, those reasons may sometimes contribute to a business shutdown, but the main reason is lack of belief.
If you are an entrepreneur, hear me say it straight to you: the reason your business fails will not be because of a bad recession or giant competitors or unfriendly banks; it will be because of you.
Most of the small business failures I have witnessed were self-fails by entrepreneur owners who consistently failed to believe in their enterprise or started caring (and worrying) about the business far too late.
This type of business failure is not limited to small businesses or cash-strapped entrepreneurs; some of the biggest failures of belief are displayed by entrepreneurs with huge resources and incredible opportunities.
Google’s Social Media Failure
Google’s Social Media Failure across the years is a direct result of non-belief.
Orkut, a Google company, was founded in 2004, a full month before Facebook; but it was abandoned by Google despite market leadership in several countries.
Jaiku, bought by Google in 2007, at one point was actually growing faster than Twitter; but it too died of Google neglect.
Wave, was introduced Google in 2009 with much fanfare; but Google pulled the plug on this baby just 77 days after opening it to the public!
At last in 2011 Google felt that it should get really get serious about social media and the company unveiled its most ambitious social media venture, Google+.
But, it was already too late for Google and for Google+. Despite getting the full might of Google’s massive online leverage, Google+ was a failure.
Google+ failed because the social media market had finally given up on Google — just as Google had consistently given up on its social media products. The millions of people who repeatedly signed up and invested their trust and time in Google’s unbelieving ventures had, at last, had enough.
The market had finally understood what Google had been saying all along through their actions — We don’t believe in our social media products, why do you?
Postscript: Till date, Google’s greatest social media success has been YouTube, a medium which they did not even categorize as social media. It is just as well they did not!
SOLUTIONS
Do this.
Commit to how much you will believe in your venture by asking yourself how important the business is to you and how much you expect the business to offer you. Then commit to, and assign it, care and respect that is proportional to your expectations.
If the business is a hobby or part-time interest you can go in with lower belief. If it is important to your life or your living — do not venture into it without a high degree of belief.
Believe me, making these decisions consciously, and early in the life of your business, will save you a lot of grief.
The Woman Who Believed
In 1978, when Kiran Mazumdar-Shaw founded Biocon India, almost no one else shared her belief.
Banks refused her loans, landlords refused to rent to her risky business, prospective employees refused to join this strange startup and raw material vendors insisted that she bring along a male manager if she wanted to do business with them!
But Kiran believed — and persevered — and started her business in a rented shed in Bangalore. Her belief paid her back and she led Biocon’s transformation into a highly respected bio-pharmaceutical company with 9,000+ employees and sales in 120 countries.
Kiran Mazumdar-Shaw could have failed; but she chose instead to believe. And the business paid back her belief.
I take care of my business and my business takes care of me. That statement may be considered a simplistic cliche, but it is something I have heard entrepreneurs who truly respect their business say, time and time again.
A business, like all living organisms, is millions of moving parts. You will never get a manual that teaches you everything you need to run your business. But if you care enough, you will learn enough about your business, and find the right solution when it is needed.
On the other hand, if you don’t care enough and believe enough, all the learning in the world won’t save that business.
3. Credit Trap
Suicide by Credit Trap is the most common method used by otherwise successful small businesses to commit harakiri.
The Credit Trap makes an entrepreneur offer his goods/services on credit, and forces him into debt just to supply his customers, by squeezing his cash flow. This is how the Credit Trap works:
Step 1: Credit is accepted as inevitable, acceptable industry-wide practice across most businesses in most countries. So, the entrepreneur offers credit.
Step 2: Once the entrepreneur starts offering credit, the increasing delay between his payment cycle and his supply cycle means that his business is in effect financing the operations of his customers!
Step 3: The entrepreneur is now juggling his finances just to make ends meet, not because the business is not profitable but because his cash is still stuck with his customers. Typically, the entrepreneur now ends up borrowing cash, just so he can finance the goods he is selling to his customers. And the very first default by his customers sadly signals the beginning of the end for the business.
Credit Trap is often wrongly bunched with Cash Flow: Credit is a cause, while Cash Crunch or Cash Flow Problem is the effect
Credit is Evil….because it is like taking the oxygen mask from your gasping baby business — and giving it to someone else who does not even need it.
It just makes it worse that the businesses you give credit to, and are in effect financing, are often far larger than yours and the precious cash you have given them on credit is barely significant to them.
As entrepreneurs, it is your duty to ethically protect your business and grow it till it fulfils its purpose of creating value for your market. Willingly going into the Credit Trap is one of the worst things that an ethical entrepreneur can do.
If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours. John Maynard Keynes
SOLUTIONS
BASIC : DO NOT GIVE CREDIT. Get fully paid in advance. The idea of giving credit to businesses who don’t even need it is just so wrong. Don’t do it.
But, if you do decide to offer credit, use these tips to ensure that your business is not the one that goes bankrupt.
: Penalize credit payments, incentivize advance payment. Have different terms for credit and advance payments.
: Insist on a short credit period — measurable in days or weeks, not months.
: Offer credit only to select clients who have proved their worth to your business.
: Your total credit outstanding should never be more than 25% of your free cash holding; there is no magic to the number, but it will help.
: The very first day you feel the need to borrow money to complete a credit order think seriously about the future of your business. Seriously.
4. Cash Flow
Cash Flow problems can afflict even extremely profitable businesses; in fact, disastrous cash flow crunches are far more likely in quickly expanding startups than in staid, static businesses.
The thing about Cash Flow is that it is less about the cash and more about the flow — the timing of it. If the incoming cash flow happens much later than the outgoing cash flow, even extremely profitable businesses can go bust.
A negative cash flow also means that the entrepreneur has less to spend on business growth. And if the trend continues, the entrepreneur is unable to pay her bills — payroll, debts, expenses — and her business would have officially failed.
Home Depot Faced a Cash Crunch
… in 1986.
This famous Home Depot story started when its rapid expansion and increasing monthly operational expenses began rapidly eating through its cash reserves. Since the company was profitable, the issue was not really that Home Depot was spending more cash than it had in its books but that it was spending its cash faster than it was coming in.
And by January 1986, it was clear that if the same cash flow trends continued, Home Depot would be bankrupt within a few months.
Home Depot’s response was to totally restructured its inventory management system, helping them reduce the cost of extra inventory purchases by an amazing 79% within one year. Home Depot also decided to manage their growth better (adding only 10 stores that year), reduce overhead expenses, lower real estate expenses, and increase profit margins.
Within a year Home Depot had reversed the cash flow problem: while sales that year increased by a creditable 44%, these efforts helped Home Depot raise their net earning by a massive 190%!
SOLUTIONS
BASIC: DO NOT GIVE CREDIT. Most entrepreneurs can solve most of their cash flow problems simply by insisting on full payment in advance.
: Create a Financial Strategy — and take it seriously.
: Conduct an Annual Financial Analysis (Monthly/Quarterly for high growth or high credit outstanding ventures) — and take it seriously.
: Regularly identify and reduce non-core expenses.
: Plan for emergencies and, when necessary, arrange for loans 2–3 months before it may seem essential.
Thanks for your time and attention. Signing off with my best wishes for your entrepreneurial venture. Prince Peter
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Or you can read the full article Why Businesses Fail: 6 Reasons/6 Solutions and mail me at prince[at]blazetrue[dot]com
Originally published at blazetrue.com
